You are already aware that owning investment property has many benefits. However, it also comes with some potential pitfalls. Unfortunately, many novice investors have been led down the wrong path by some late-night infomercial about buying investment property with no money down.
If you are struggling financially, don’t expect ownership of investment property to turn your life around. You should be well positioned financially and able to devote the necessary time and research required for each property. Only then can you determine the best strategy for building your portfolio and recognize the best financing options.
Here are just a few benefits of financing your investment property.
Appreciation of your highly leveraged property
With a small down payment and a conventional mortgage, you can purchase a valuable investment property by using very little of your own money. You are buying the property primarily using debt. This is referred to as being highly leveraged. The actual purchase price of the property can be five, ten, or even 20 times the amount of your out-of-pocket money.
Any appreciation of the property is on the total value of the property, not just your cash investment. It remains one of the best ways to accumulate wealth and continues to be done by people of every income bracket.
Renters pay down the debt for you
This key benefit to financing and owning investment property is also where many investors get tripped up. They try to live off the rental income and pay down the debt at the same time. These people often end up hoping the property will quickly appreciate in value so they can sell it for a huge profit to bail them out of their dire financial situation. In time, you can pocket a portion of your rental income and sell the property for a profit, but you need to be financially stable enough to wait for the right time to do this.
Tax benefits
As a landlord, you can deduct interest on loans used to purchase, repair and maintain your investment property. There are many other expenses related to your property that qualify for deductions. Be sure to discuss travel expenses, legal fees, and other payments made to professionals with your tax advisor.
One of the best deductions involves using a depreciation schedule based on your purchase price of the property. You can depreciate the purchase price of the property even as it increases in value.
Speak with your tax advisor before choosing which method of financing is best for you. Hard money loans often have longer terms, but soft money loans typically come with more flexible payment plans.
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