The benefits of owning rental properties are quite extensive and I will list them as best I can:
Rental Income
The first advantage of owning Rental Property is obviously the rental income you receive each month or period you choose. Rental income is considered a type of passive income and rental property is considered a business. This means that rental property follows the tax laws of businesses which means the government doesn't automatically take money from you like they would if you were an employee. The best part about rental income is that it is fixed for inflation. If you get a fixed rate mortgage for 15 or 30 years that payment will never change because it's "fixed". However, your rental income will increase with inflation over the years creating a bigger gap between your expenses and your income. For example, if I have a piece of real estate property that I have to pay $500 a month for and my rent is currently only $525 then I am only making a $25 profit each month. Over time inflation sets in and rent will increase so that perhaps 5 years down the road I could charge $700 a month rent for the exact same apartment but still only pay $500 in expenses.
Phantom Cash - Depreciation
Phantom Cash can be taken literally, it is money that doesn't exist. Phantom Cash is a government incentive and tax loophole of the rich so they can furthermore benefit from real estate. The government states that you can take the value of a building divide it by 27.5 years and deduct that amount from your taxable income every year. Let's say that I buy a building valued at $60,000 and I rent it out at $500 a month ($6000 a year) then I would be allowed to subtract ($60,000 / 27.5)about $2181 a year from my taxable income. Meaning I would only have to pay taxes on $3819 $(6000-$2181) for that year not including the other deductions you get from real estate. There are a variety of tax advantages for real estate which makes it one of the best investment vehicles out there.
Appreciation
Appreciation is something just about everyone is familiar with. Over time your property will generally appreciate in value depending on the area. This is caused by several factors; inflation, cost of supplies, desire to live in certain areas, etc. If you buy a house for $60,000 and it appreciates at 2-4% a year(close to the national average) in 5 years your property would be worth somewhere between $66244-$70191 and all you had to do was own and maintain it for those 5 years. If you pick the right area you could do well with Appreciation. For example, from 2001-2005 in Sierra Vista, Arizona the property values nearly doubled. If you bought a house for $114,000 in 2001 people were easily selling these for up to $200,000 in 2005. The next section is going to talk about how to take advantage of appreciation and equity in your properties without paying taxes on them.
Tax Deferred
There exists a form, called a 1031, which allows you to sell a property with the intent of upgrading to a more expensive property and not having to pay taxes on any of the capital gains you received from the transaction. For example, if you buy a house at $100,000 and you sell it 5 years later at $150,000 then you would be responsible for paying capital gains taxes on the difference $50,000 ($150,000 - $100,000). To get around this you use a 1031 form which allows a third party to hold the money for a period of time until you can put it back into another real estate investment of greater value. This allows you to keep upgrading your rental properties using appreciation without having to pay taxes on it.
The Home Equity Loan
Other Deductions
Interest on Mortgage
As with being a home owner, interest on a mortgage can also be used as a tax deduction against rental income. Let's use the figures above after the phantom cash deductions were taken out. On a building valued at $60,000 that earns $6,000 a year rental income after phantom deductions we were down to $3819 taxable income. Most fixed mortgages rear load interest, which means you pay mostly interest in the beginning and somewhere around the midway point it balances out and you pay mostly principal after that point. For scenario purposes let's say you have a $48,000(20% or $12,000 down payment) mortgage on that property at 6% interest for 15 years. Your payment on the mortgage would be about $405 dollars a month or about $4860 a year and the schedule would look like this for the first 3 years:
* I = Interest, P = Principal, B = Balance
* I: $2,824.62 P: $2,036.00 B: $45,964.00
* I: $2,699.04 P: $2,161.58 B: $43,802.42
* I: $2,565.72 P: $2,294.90 B: $41,507.53
The first year you would be allowed to deduct another $2842.62 from your remaining $3819 which leaves you with about $977 taxable income. From this remaining money you are also allowed to deduct repairs, loss of money due to tenants not paying rent, property taxes, and possibly a few other things. Even if you were in a 15 percent tax bracket you are talking about having to pay 15% of $977 about $147 in taxes. That's not including property taxes or repairs either. Rental Properties can be virtually a non-taxable form of income when you start out and still give great tax advantages when you are further down the line.
Real Estate Taxes
Paying Children to work (if under 18 no taxes or social security).
Other ordinary and necessary expenses.
Others Paying for your Investment
When you own rental real estate you will have others making the payment and building equity for you.
