One of our most frequently asked questions by investors is “What if my rental income does not cover my mortgage payment in its entirety? That really is a great question, and let me provide you with the answer. As an investor, many landlords focus only on the couple of hundred dollars of a loss they see every month, but the fact is, that they ignore the thousands they are gaining elsewhere. Where they have to shift their focus to is, even if the rental income doesn’t cover the full mortgage, the tenant is still paying down the majority of the loan. This is essentially a “forced savings account” funded by someone else. Another big factor is appreciation. Historically, real estate values tend to rise over time. Just a 3% annual appreciation on a $400,000 home is $12,000 a year—far outweighing a small monthly deficit. Let’s not forget the tax advantages. The IRS often allows landlords to claim depreciation, which is a non-cash expense, also a tax shield.
A property can show a “loss” on paper due to depreciation and interest deductions, which may lower the landlord’s overall taxable income. You will want to check with your accountant on how these deductions can affect your tax filings. Also, did you know if you do decide to sell an investment property in the future, you can sell with a 1031 Exchange? This is an IRS rule where landlords can defer capital gains taxes indefinitely by rolling the equity into a larger property later, a strategy that only works if they hold the asset. By using rental property as an inflation hedge, remember this, a property that loses money today most likely will not lose money in the next couple of years. Your fixed mortgage remains the same, HOWEVER rental income generally increases with inflation, coupled with the appreciation factor, your market value will increase as well.
Whether you are looking to purchase your first investment property, adding to an existing portfolio, or have any questions pertaining to investment properties, please contact us at 407-544-0827. TrustHome Properties, your trusted advisors.
