Top 5 Reasons You Should Invest in Rental Properties

By Frank Uhler

You worked hard and effectively stashed away a solid portion of your income into savings.  Now comes the question most people struggle with, “how should I invest my hard earned savings?”  In today’s financial markets there are a significant number of investment vehicles for an individual investor to choose from.  Furthermore, interest on savings or money market accounts is historically low.  

Those who diversify their investments into stocks, bonds, ETFs, etc., tend to enjoy the simplicity and speed of online brokerage accounts (I know because I used to be one of these people).  Investing directly in income producing real estate is not as easy as clicking a button, but can produce superior returns as a result.  

For those considering adding real estate to their portfolio of investments, I have included the top 5 advantages of this type of investment.

1. Passive Income – At its core, real estate investing is a purchase of a future income stream. When done correctly, this income stream is often much greater than you could achieve from other types of investments and should increase over time.  Once all of the property operating expenses and debt service is paid for the month, the remaining “profit” is kept by the owner.  This leftover profit is similar to a dividend received from stock investments, which both result in the receipt of passive income.  

OVER THE LONG TERM, PASSIVE INCOME IS A GREAT TOOL FOR BUILDING WEALTH

The cash dividend provided by real estate investments will vary based on several different variables such as: location, property type, competition, risk tolerance, and various other factors; however, many real estate investors attempt to achieve a 6-10% cash dividend on their investment.  This is significantly higher than the average trailing twelve-month dividend yield of the S&P 500 as of March 2017, of 1.97%.  The S&P 500 dividend yield approximates the average dividend paid by companies in the S&P 500.  

For example, if you invest $50,000 of cash into an investment property, and the property produces a cash flow dividend of 8% throughout the following year, you will earn $4,000 of passive income off this investment. If you are able to slowly build the number of investment properties in your portfolio to 10 similar properties, this could eventually result in $40,000 of passive income each year.  Over the long term, passive income is a great tool for building wealth.  


2. Value Appreciation and Stability – Although the market value for real estate is cyclical, real estate tends to be a more stable asset.  Unlike the stock market, there is not a daily quote for individual real estate asset values.  Furthermore, there is lower transaction volume because of the higher costs and longer timeline involved in real estate transactions.  Lastly, the impact of inflation can typically be passed on to tenants in the form of higher rents, resulting in appreciation of the property value.

YOU HAVE A GREATER POTENTIAL TO DIRECTLY IMPACT THE PERFORMANCE OF YOUR INVESTMENT


3. Potential for Value Creation – Unlike stocks and bonds, you have a greater potential to directly impact the performance of your investment.  Full time investors often create additional value, through property rehabs, improved utilization of the space, or superior management, including economies of scale on maintenance and property management staff.  The resulting increase in rent from rehabbing a property typically results in an overall increase to the cash flow and total return of a real estate investment.  Even small improvements to a unit, such as adding washer/dryer or updating a bathroom, can often result in rental increases of a few hundred dollars per month.
 

4. Leverage – The appropriate use of debt in real estate can help you increase returns.  The main advantage of leverage is that the initial capital required to buy a property would typically only be around 20-25% of the price (even less in some instances).  This would allow an investor to purchase a $1M real estate investment property with only $200K of cash. Additionally, your outstanding loan balance is being paid down over time through the rent payments of tenants.

Properties can also be re-financed after the value has increased (whether due to rehab work or strengthening market).  The return of capital through a re-financing will provide an investor with access to equity earned through the amortization of debt, or the increase in the property’s value.  

For example, after 7 years your $1M property has increased in value to $1.23M (approximately 3% appreciation per year) and your outstanding loan balance has gone from $800K to $675K.  If you decide to re-finance your property using a loan that is 75% of the value, then you will receive a new loan of $923K.  Once you pay the old loan off you are left with approximately $248K of proceeds (return of your initial investment of $200K + $48K of additional cash).
 

5. Tax – There are many tax benefits to owning real estate, which differ based on your classification as a passive investor or a real estate professional.  A tax lawyer or accountant should typically be consulted about the specifics of your situation, but I will highlight the general benefits to a passive real estate investor.  The following real estate investment related expenses can be deducted from your taxable income:

  • Mortgage interest expense (for loans to acquire or improve rental property)
  • Repairs & maintenance
  • Depreciation
  • Insurance premiums
  • Casualty and theft losses
  • Legal & professional services
  • Travel expenses (for property related trips)

Deducting these expenses can significantly reduce your taxable income for the year, therefore decreasing your overall tax liability.  


If you read these benefits and are now considering making your first real estate investment, stay tuned for my next blog on the “best ways to invest in real estate.”
 

10 Simple Steps to Buying a Home

By Melissa Williams

Navigating through the maze of home buying can be overwhelming, especially as a first-time buyer. What in the what is earnest money? What is the importance of getting pre-approved? With the assistance of a great team, we can make the home buying process a breeze. There are typically a couple of key players to ease the home buying process; a mortgage broker, a Realtor, and an attorney. Throughout the process, you will also work with a home inspector and an appraiser. Here are the major steps to home buying:

  1. Contact a mortgage broker and get pre-approved. Your mortgage broker will help identify if there are any areas of improvement that would help lower your interest rate or increase your spending power, such as paying down a credit card or improving your credit score. Your mortgage broker will be a KEY player throughout the process by getting you approved for a loan.
     
  2. Contact a Realtor. Your Realtor will help coordinate, educate, provide expertise and help  negotiate the best possible price. Your Realtor will serve as your confidant throughout the home buying process.
     
  3. Create a home buying wish list. Break your list down to your non-negotiables and items that would be nice to have, but could live without. Your Realtor will help you fine-tune your wish list as well.
     
  4. Select your desired area and begin looking at homes.  After viewing a few homes and getting a feel for your tastes, your Realtor should be able to keep an eye out for the perfect property for you.
     
  5. Make an offer. Once you find your dream home, put in an offer with the assistance of your Realtor.
     
  6. Contact a real estate attorney. Your attorney will play a key role in the home buying process following offer acceptance. 
     
  7. Contact a home inspector. The home inspector will do a thorough inspection of your home and will provide you with a detailed report.
     
  8. Get home appraised. If agreement is reached following your home inspection and attorney review, your mortgage broker will schedule an appraisal. The appraiser will determine the value of your future home.
     
  9. Complete a final walk through. The day before or the day of closing, you will walk through the property to verify there have been no changes in the home and any requested repairs have been made. 
     
  10. Closing day! On average, from offer acceptance to close, it takes about 45 days to close. Once all of the above steps are completed, you will close on your home. This typically takes about 2-3 hours and is the final step towards home ownership. Typically closing will be held at a title company or an attorney’s office. 
 
 

Please contact Melissa Williams at 224.235.2448 or Mwilliams@honoreproperties.com for a complimentary home buying consultation.    
 

5 Benefits to Using a Realtor for Rentals

By Tim Stroh

Despite the fact that nearly all buyers of real estate use a Realtor to help them find the perfect property to purchase, many consumers do not utilize the help of a Realtor when they are looking to rent. Below is a list of five important reasons why you should consider using a Realtor to supplement your rental search. 

  1. Market expertise. Realtors have the market knowledge that can come in handy during your search. Realtors are able to look up comparable units and buildings in the area that you’re considering to make sure that you are getting a fair rate. Realtors can provide you with average rental rates for different neighborhoods, which can also help you narrow your search to areas that fit your budget. 
     
  2. A Realtor can save you money. Realtors can use their market expertise to negotiate a lower rental rate on your behalf. Many renters are not aware that rent prices are almost always negotiable, particularly when renting a home or condo. Realtors can also help negotiate the waiving or lowering of fees associated with rentals, and/or the inclusion of parking, storage, etc. 
     
  3. You do not have to pay a broker fee. In the Chicago area, Realtors receive their fees from the landlord or management company, so they are providing a free service to the renter. On top of that, a Realtor only gets paid if they find you a place, further motivating them to do the best job possible. 
     
  4. Notification of new rentals as soon as they hit the market. If you decide to use a Realtor, they can set you up to receive listings that fit your criteria as soon as they hit the market. This means that you can beat the competition by scheduling a showing before others even see that it is available. It also means that you don’t have to necessarily skim various rental websites every day to see what’s new. While you can often set up a new listing notification email for sites like Zillow and Hotpads, there is often a lag time between when the unit is listed on the Multiple Listing Service (MLS) and when the listing hits the feeder sites. Having a leg up on timing can be crucial when looking for your next home.
     
  5. Convenience. A Realtor can take the information you give them in terms of what you’re looking for and set up showings that are back to back, where they drive you around to various options that match your search criteria. This means you don’t have to spend your time calling or emailing various landlords to set up showings on random days and times. 
 
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