Rental properties have five primary factors that contribute to the return on investment.
- Leverage – when borrowed funds are used to control a larger asset, it increases the yield.
- Appreciation – investing in rental properties is essentially a long term investment. Appreciation of the asset over time can deliver satisfactory returns.
- Equity Build up – a results from the amortization of the loan which requires that a portion of the monthly payment reduces the principal owned.
- Cash Flow – when rents are greater than the expenses of operating the property and servicing the debt, there is a positive cash flow.
- Tax Savings – can offset income from other sources. In today’s environment, tax savings are more likely valued as incidental benefits.
Savvy investors today are using conservative estimates for long-term holding periods. The combination of low mortgage rates and rising rents and values are attracting investors to single-family homes in predominantly owner-occupied neighborhoods. An investor’s motivation factor can change from property to property. One can ignore the benefits of tax savings, potential appreciation and leverage, if the cash flows makes a rental property a smart investment alternative.
What would your motivating factor be?