Rental Property Investment Return

Rental properties have five primary factors that contribute to the return on investment.

1. Leverage – when borrowed funds are used to control a larger asset, it increases the yield.
2. Appreciation – investing in rental properties is essentially a long term investment.  Appreciation of the asset over time can deliver satisfactory returns.
3. Equity Build up – a results from the amortization of the loan which requires that a portion of the monthly payment reduces the principal owned.
4. Cash Flow – when rents are greater than the expenses of operating the property and servicing the debt, there is a positive cash flow.
5. 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?