Coaching and teaching - many through the mortgage process and others on the field

Tag: rental income

The Benefits of Owning Investment Property

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Investing in real estate, specifically purchasing an investment property, can offer a multitude of advantages that go beyond traditional investment opportunities.

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Buying an investment property provides individuals with a unique opportunity to grow their wealth, generate passive income, and gain long-term financial security.

Let’s take a look at five key benefits of investing in real estate…

Appreciation and Wealth Accumulation

One of the primary advantages of investing in an income-generating property is the potential for property value appreciation over time.

Real estate almost always increases in value year-over-year, making it a reliable long-term investment – and you can find more on that here. As the property value increases, so does your net worth!

Moreover, you can leverage this appreciation to build equity, enabling you to secure additional loans or invest in other properties, leading to further wealth accumulation.

Steady Cash Flow and Passive Income

Owning an investment property allows individuals to generate consistent cash flow in the form of rental income.

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By renting out the property, you can earn a steady stream of passive income, even while you sleep. This reliable income can be used to cover mortgage payments, property maintenance expenses, and other financial commitments.

With careful management and regular tenant screening, you can maximize your rental income and achieve financial stability.

Tax Advantages and Deductions

Investment properties come with several tax advantages that can significantly benefit property owners.

These include deductible expenses such as mortgage interest, property taxes, insurance premiums, and maintenance costs. Additionally, real estate investors can take advantage of depreciation deductions, which allow them to offset their taxable rental income.

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These tax benefits can help reduce your overall tax liability and increase your net income from the investment property.  Please contact your tax accountant for the specifics!

Portfolio Diversification and Risk Mitigation

Investing in an income property provides an opportunity to diversify your investment portfolio.

Real estate typically has a lower correlation to other asset classes like stocks and bonds, which means it can act as a hedge against market volatility. By diversifying your investments, you can spread the risk and reduce the impact of a single investment’s poor performance.

Real estate’s stability and relatively consistent returns can provide a solid foundation for your overall investment strategy.

Long-Term Financial Security and Retirement Planning

Investing in an income property offers a long-term strategy for building financial security and planning for retirement.

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By consistently collecting rental income and building equity, you can create a reliable income stream for your retirement years. Furthermore, as you pay off the mortgage on the property, your monthly cash flow will increase significantly.

Real estate investments can serve as a tangible asset that appreciates in value and provides financial stability for your future.

In Conclusion

Purchasing an investment property offers numerous benefits that are easy to understand and can be advantageous for individuals seeking financial growth and stability.

The potential for property value appreciation, steady cash flow, tax advantages, portfolio diversification, and long-term financial security are compelling reasons to consider investing in real estate.

While investing in property requires careful research and management, it can be a rewarding endeavor that provides both immediate and long-term benefits.  Do reach out to me for more and how to finance the purchase of an investment property.

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Rental Income and Qualification for Investors

I receive a fair amount of questions from real estate investors, asking about rental income and how that is calculated in their overall income that will enable them to qualify for mortgage.

The amount of rental income that may be used and how it is calculated will depend on multiple factors – such as when the borrower obtained the rental property, when rents were collected, and what how many units there are with the subject property.

Underwriters are looking for the likelihood that the rental income will continue, as well as any potential losses too.

If your rental is producing a net loss, it will absolutely be factored into the debt-to-income ratios that are used for qualifying.

Here are some of the standard guidelines for determining rental income.

Calculating rental income when the property is being purchased

  • If the property is leased, then copies of the current signed lease agreements may be required.
  • If the property is not currently leased, then the lender may use “market rent” information provided by the appraiser.
  • When there is no rental income for the subject property on the borrowers tax returns, the rental income will be reduced to 75% of the gross rental income provided on the lease.

Calculating rental income when the subject property is being refinanced

  • Copies of the fully executed lease agreements must be provided (assuming the home is currently rented).
  • If the borrower owned the property during the previous year, they will need to provide tax returns. The lender will use the information provided on Schedule E to determine the net rental income/loss.
  • If the property was rented for a portion of the previous year, the lender will still need to provide a copy of the tax returns, including Schedule E. The borrower will also need to explain (and document) why the home was not rented for the full year.  For example, was the home recently purchased or out of service to be renovated.
  • Rental income will be averaged based on the months the home was in service the previous year.
  • The lender may also rely on “market rent” data from the appraisal.

What if you’re converting your existing home into a rental to buy another home?

  • The rental income may be used if you can provide:
    • A fully executed lease agreement – and this lease may be month-to-month
    • proof of security deposit from the tenant and first month’s rent (cancelled check); and
    • a bank statement showing the deposited security and rent deposit.
    • 75% of the verified rental income can be used to offset housing expenses

With that said, there are other options – outside of the standard conventional products for investors. Some enable borrowers to use only the expected rental income to qualify – without providing income or tax returns. Contact me for more information, as it would be my pleasure to help!

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