The 4 Benefits of Owning Rental Property as a Business
As a real estate investor, you are an entrepreneur and business owner. However, to achieve the highest financial benefits, both with income and tax incentives, ensure you classify and run your real estate investments as a business. When done well, real estate investing with rental property will build short-term income and long-term wealth.
What is a Buy and Hold Real Estate Investment Strategy?
Real estate investors often use the buy and hold investment strategy to build passive income and equity in a property. With a buy and hold strategy you purchase a property with the intent to hold on to the property and not sell it in the short-term.
The property owner rents or leases the property out. Rental properties include both long-term rentals and short-term rentals, like with vacation properties. Both types of rentals produce income. Often the type of property and geographic location impacts whether the property works best as a short-term or long-term rental.
Four Benefits of Rental Properties
Owning rental properties offer many benefits, but treating your rental properties as a real business leads to financial gains.
1 – Property Value Appreciation
Over time real estate experiences increases in value, or appreciation. Even in times of economic downturn when properties may lose value in the short-term, the value still increases over time. To achieve the best gains, it typically works well to hold a property for 7 to 10 years.
When you invest in rental properties, along with other short-term investments strategies, you realize the benefits of the various methods. These long-term investments build long-term wealth. Also, rental properties experience less market volatility than riskier investment strategies.
The property appreciation builds equity in the property. Especially if you made renovations to a property you purchased under value, you may see equity quickly. Then the equity value becomes available for future investments, like with the BRRR method.
2 – Provides Mortgage Payment
When you treat your rental property like a business, you set the rent at a rate that matches the current market rental rates with an understanding that you must also cover the mortgage and expenses. The goal is to make money with rental properties.
The renters monthly fee pays the mortgage which means your principle payment amount reduces each month. Over time, you decrease your mortgage debt. If interest rates become lower than when you first purchased the property, consider a refinance at a lower rate. Your expenses become less. Then you make more money each month from the rent.
When you decide to sell the property, you make more money because you owe less. Plus, if you hold the property long enough, you may no longer owe anything on the property. At that point the sale becomes profit.
3 – Tax Benefits
Build a relationship with an accountant experienced in real estate investing to receive the most tax benefits from your rental properties. Since your rental property is a business, you can deduct business expenses from your revenue. For example, HOA fees, maintenance, repairs, supplies and travel all act as deductible business expenses when related to the rental property.
Also, consider the tax benefits from mortgage interest deductions. The deductions add up reducing the taxable income. However, you must proactively classify your business correctly to achieve the tax savings you want. The IRS has specific criteria for real estate classification. Work with your CPA to ensure correct classification for maximum tax savings.
4 – Passive Income
One of the best benefits of rental properties is passive income. You make money each month on the properties you rent. While new investments take a while to make money, over time your income increases with little effort.
New rental properties often require upgrades and marketing expenses. Yet, once you begin renting the property, you recoup those costs. If you also then use the equity on your property to purchase and upgrade additional properties, your business grows. Your passive income grows too!
Invest in Rental Properties in Combination with Other Strategies
Rental properties are smart investments. However, to realize true success as a real estate investor, treat all your investments as part of a business. This means you build a real business both legally and operationally. Create a business plan, stay organized, put the right team in place and diversify your investment strategies.
Diversifying your investment strategies deepens your portfolio and provides short-term, long-term and passive income. For example, combine a buy and hold strategy with fix and flip or wholesale deals. You gain knowledge and protect your business from market shifts when you understand and use various investment strategies.
Learn More About Rental Property Business Growth
Laura Alamery Real Estate Investment Coaching offers training, mentoring and coaching for real estate investors.
Whether you are just starting out or want to grow your existing investment business, there’s an option to meet your needs.
We offer both group coaching and one-on-one coaching programs. You receive step-by-step training on strategies like buy and hold.
In addition, you receive access to our resources library to help guide the details of your business operations.
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