An investment property is a real property that generates income, such as a rental in a duplex or home. Owning an investment property allows property owners greater control of their destiny since they can select the particular property they wish to invest in and their tenant. Owning investment properties can often provide significant advantages to investors, including greater financial security. The following is an CT real estate attorney's advice on the pros of an investment property:
Having an investment property provides built-in cash flow. Usually, investment properties are rented out to residential or commercial tenants. The investor receives rental income in exchange for renting out the property. The rental amount is usually in excess of the mortgage payment. Even with paying for insurance and maintenance costs, the typical investor still has an excess of income over the amount of the mortgage each month. This income is usually passive, meaning that the investor does not have to commit much time to secure the income once a tenant occupies the property. Cash flow from an investment property is usually more predictable than income from other types of businesses.
Having tenants occupy a property that is mortgaged can help pay off the principal of the loan more quickly. Many properties have a 30-year fixed rate mortgage leveraged against them. With this type of loan, a large portion of the payments during the early years of the loan are paid to interest with less going toward the principal. As the age of the loan progresses, more of the payment goes to the interest rate. The longer you own the investment property, the more debt that the tenant helps to pay off and the greater amount of wealth you build for yourself.
Investment property owners may be entitled to significant tax deductions. Some possible tax benefits of an investment property include:
- Writing off interest payments
- Writing off costs to ensure and maintain the property
- Writing off travel expenses related to maintaining the property
- Writing off property taxes
- Writing off legal or professional fees
Additionally, investment property owners can depreciate their asset pursuant to a depreciation schedule for a further tax benefit. All of these deductions allow the overall reported income of the asset to be lowered so that the tax burden is also lowered. This equates to investment property owners being able to keep more of the profits than other types of business owners. Unlike with many other types of businesses, self-employment tax is not imposed on investment property owners.
Real property generally increases in value over time. Therefore, the longer that an investor owns a property, the more valuable the asset will likely become. This allows the owner to keep the cash flow for many years and then eventually to sell the property for more money than it was purchased. In this manner, purchasing an investment property can effectively hedge against inflation. Over time, rents and real property values increase. Since many investment properties are secured by a fixed-rate mortgage, the price of the mortgage payment does not go up even if the value of the property does. Don't hesitate to reach out to a Connecticut Real Estate Attorney to discuss the options available for you today.