Should You Diversify Into Rental Properties?

As an entrepreneur and investor, you should always be looking for ways to diversify your portfolio so that you can minimize risk and maximize ROI. You’ve probably heard from your friends and folks in your network that owning rental properties in your portfolio is a great way to do this. But why exactly? That’s a question we’re going to explore in more detail.

The Diverse Benefits of Rental Properties

Rental properties are widely considered among the best investments you can make. There are actually several reasons for this. In other words, the beauty of owning rental properties is that you can benefit from them in a variety of ways. Let’s take a look:

1. Steady Income Stream

One of the most appealing reasons to invest in rental properties is the potential for a steady income stream. Unlike stocks and bonds, which can see earnings fluctuate significantly, rental income tends to be more stable and predictable.

As a landlord, you collect rent on a monthly basis, providing a consistent cash flow that can cover the property’s expenses and generate a profit. This steady income can be particularly advantageous during periods of market volatility. (Rental properties actually tend to perform better during recessionary periods where other investments might yield a negative return.)

Now, it should be noted that it takes some work to optimize your cash flow. If you’re a first-time real estate investor, you’ll probably need some help dialing in your numbers and getting things optimized so that you come out on top each month. This is where having a property manager in your corner really helps.

2. Appreciation Potential

Over time, real estate typically appreciates in value. This means that while you’re earning rental income, your property could also be increasing in worth, providing you with a profitable return on investment when you decide to sell.

Real estate appreciation rates can vary widely depending on several factors, including location, market conditions, and property improvements – but the long-term outlook is almost always positive. By carefully selecting properties in growth areas or regions undergoing revitalization, you can maximize your chances of substantial capital appreciation.

3. Tax Advantages

Investing in rental properties can offer several tax benefits. You can deduct numerous expenses associated with owning and managing a rental property, including mortgage interest, property tax, maintenance costs, property management fees, and insurance. Additionally, there’s depreciation, which allows you to write off the cost of the property over its useful life, reducing your taxable income each year.

4. Inflation Hedge

Real estate is often considered a hedge against inflation. When inflation occurs, the value of money decreases, but real estate typically increases in value or remains stable. Plus, rental rates tend to rise alongside inflation, which means your rental income could increase over time. This makes rental properties an attractive investment as they can protect your purchasing power when inflation hits.

5. Leverage to Multiply Your Investment

Real estate is unique in that it allows you to use leverage – using borrowed capital to increase the potential return of an investment. For example, you can purchase a property with a 20 percent down payment while financing the remaining 80 percent with a mortgage. This means you are controlling a full property and enjoying its full benefits for a fraction of the total cost. As you pay down the mortgage, you build equity in the property, which increases your net worth.

As your rental portfolio grows, it actually becomes easier to invest in other properties, as lenders will allow you to use the existing properties in your portfolio as leverage for buying additional properties. In this sense, it has a compounding effect.

6. Control Over Your Investment

Unlike stock investments, where business decisions are made by corporate management teams, real estate investing gives you direct control over your assets. You can make improvements to the property, decide on the rental strategy, choose your tenants, and negotiate lease terms – all of which can directly influence the performance and profitability of your investment.

Is the Timing Right?

While the benefits are clear, this is ultimately a personal decision that comes down to one simple question: Is now the right time?

Owning rental properties as part of your portfolio is always going to be a “yes” on paper. (As we’ve just discussed, the benefits are numerous.) However, you have to decide if now is the right time to deploy your capital. If the answer is yes, well…what are you waiting for?