For those that are either retired or looking to enter retirement in the near future, finding a diversified way to invest money and build dependable retirement income streams is very important. For those that are looking to diversify their income and continue to build wealth, purchasing an income property could be a great option. Buying a good income property will provide an investor with a variety of different benefits.
For people in retirement, one of the main advantages is being able to generate a new stream of income. Those that are able to purchase a good piece of investment real estate will receive income from tenants through lease agreements on a monthly basis.
Finding Diversified Income Streams
Beyond receiving cash flow from the income property each month, an investor will also benefit from an income property because they tend to go up in value over time. While real estate prices have declined over the past few years, prices appear to have finally stabilized and they are likely to increase in value slowly over the next decade. This could end up allowing the owner to build a significant amount of additional equity in the property.
Another key advantage of owning an income property is that it comes with significant tax advantages. People who own income real estate are able to claim depreciation, which is a non-cash expense. Depreciation can be up to about 4% of the value of the property. It shows up as an operating expense and directly offsets the rental income received. Those that end up showing a loss on their investment real estate could then use the loss to offset their other sources of income, which will then reduce their overall tax liability.
For most retirees, the best option when purchasing an income property would be to attempt to obtain a mortgage or equity loan from a bank to help finance at least a portion of the purchase. Real estate tends to be a very significant investment, so it may not be possible for some people to purchase the property entirely in cash. Even those that have the cash to do so, should consider leveraging the purchase as it would provide them with the ability to use that capital either purchase more investment properties or use it for other investments.
While there are clear financial advantages to owing a piece of investment real estate, those that are looking to purchase real estate will need to take several things into consideration prior to choosing the asset that they want to buy. First, an investor will need to make sure that they will be able to rent the property out at a favorable level. Prior to purchasing the home, the investor should spend time analyzing the market to determine what average rental rates and vacancy rates in the area are. From there, the investor should be able to determine if they will be able to rent the place out for enough money to earn their target level of cash flow, while also factoring operating costs, such as real estate taxes and maintenance that come with owning a property.