Five Simple Reasons to Buy an Investment Property

(I want to start off by clarifying the content below was not generated by me asking a question of Chatgpt. Admittedly, these are quite widely known ideas, but still my own thoughts. Thoughts that have been confirmed by being an active realtor and real estate investor. Sorry, I just had to state that.)

Four unit residential property that I invested in located in West Adams

There may be an association that being a landlord is unattainable or a lot of work. There are many tools and ways to make owning investment property much more attainable than many think. Hard work? Yes, this is true at times, but considering the reasons listed below, the effort is more than worthwhile. Buying a residential property to rent out, is an investment strategy very well suited for people who have another source of income. While getting started, the income will be more modest and the time commitment required is manageable in conjunction with other responsibilities. Below are my top five reasons to buy residential investment property:

1. Cash Flow -

Even in a higher interest rate market an investment property can produce positive net income. On a smaller property this will not be the type of income you will quit your job for, but it adds up. See a video blog post from last year where we calculated modest cash flow on a duplex that currently enjoys approximately $1,600 cash flow per month https://www.instagram.com/p/CfE6mQHje7W/ (at time of acquisition when this was shot, our expected rents were more modest, and so in fact cash flow came out ahead of expected).

Once the property is stabilized, you can expect minimal work, and to a certain degree the income becomes passive. When calculating an investment's possible cash flow, you are not only considering the operating expenses (taxes, insurance, water bill, maintenance), but also the debt service. The cash flow will be your take home after everything is paid. It’s consistent  and reliable income that in a sense goes on autopilot. 

2. Appreciation -

The best part of an investment property might be the cash flow, but there are those who would argue that the best part is actually the appreciation. The beauty of real estate as an asset class is that you get both. A cash flowing property is easy to hold for the long haul, as once they are stabilized, they run quite self sufficiently--all the while appreciating. The same way an owner occupied house does, over the long term an investment property can double or triple in value in a 30 year hold period. That kind of appreciation is not only great in retirement, but a great tool to access capital to reinvest. 

Appreciation doesn’t have to be passive though. One may force the appreciation in a short period through value add. Bigger Pockets guys coined this as the BRRRR strategy (Buy, Rehab, Rent, Re-Finance, Repeat). You buy a fixer fourplex, improve some of the units and exteriors, rent at top of market rents, and through that now realized appreciation via value add you draw out the equity to buy another.  And don’t forget, you could have likely leveraged the property by buying it using no more than 35% of your own money. But once you own it you enjoy 100% of the appreciated value. (Opposed to a stock, where if you want $100 worth of shares, you typically need to use your own $100 to buy those shares.)

3. Tax Incentives

So, you get the cash flows, you get the appreciation, anything else? Yes, …depreciation! This tax structure is the greatest advantage given to landlords. Although, as mentioned above, we all know the property is appreciating, the government tax rules let you view the building itself as something that is separate from the land. Something separate and something that is going down in value much like a car or a piece of equipment (depreciating). Wild right!? To think your fourplex is steadily decreasing in value over time, is in essence what this means. When your accountant files your taxes they can claim the depreciation as a write off. The sum of total depreciation is pro-rated across a 28 year period, and so each year even though you are profiting positive cash flow, the depreciation of the structure itself will go against those profits and reduce your tax liability on your overall income taxes.

Do keep in mind, and what is not always explained, that at time of sale you are paying a portion of that back--but at a lower tax rate. If you're getting a large sum in proceeds when you sell the property, it makes sense to offset as much tax as possible up to then, and in doing so enjoy the annual personal tax savings you get by steadily writing off the depreciation. 

4. Maintain a Standard of Lifestyle as a Renter

A trend that I have been noticing and hearing more about (with two clients of mine practicing this), is that a new young generation of owners are choosing to be landlords--not home owners. Going away is the American dream of living in the place you own and calling your home. Today many young professionals are happy to rent in an area and in a building they really like. These buildings are often full service, with incredible amenities. In a couple years they move out and try another building, or move cities. They enjoy a clean, carefree home lifestyle with never needing to repair a roof, or to call a plumber, and are in an environment that is beautifully designed and close to their friends and favorite hang outs.

In addition to wanting that choice, the other reason, which comes from lack of choice, is that they are forced into the situation by the high cost of homes today and the lack of inventory. An investment property can be purchased in any part of the city, or any part of the country. Example is if you live in Los Angeles, buying a home in suburban Arkansas that makes you a few hundred a month in cash flow, is way more attainable than purchasing a home to live in. However, you're not limited to far away markets. If you want to buy, say a fourplex in Los Angeles, you can go in on that with a handful of friends and own a portion of the investment, cash flows, tax benefits and appreciation of the property.

5. Mortgage is paid off by Tenant

The greatest part of an investment property in my opinion, is you’re not the one feeding the investment--the tenants are. Once you own it, they will be making all the tax, mortgage, insurance, and maintenance payments on your behalf. Then at retirement you have a near fully paid off building that has increased in value. 

There are many others, but these are my five top reasons to invest in a residential investment property. In the U.S., particularly in California, we are swapping from being predominantly homeowner nation to a renter nation. Many wealthy countries in Europe like Switzerland, Germany and Austria have much higher percentages of renters in their populations. As we seem to shift more towards being a renter nation, being a landlord becomes even more attractive.