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Fewer people than ever are buying homes. According to the U.S. Census Bureau, the home ownership rate is currently at lows not seen since the 1960s. At just over 60 percent, this somewhat troubling trend is seen by many as a result of the economic struggles of the millennial generation.
But, there is more to it than that. While demand for houses is down, the market is also being constrained by supply. There simply aren’t enough houses for sale to meet the needs of those who want to buy one.
There’s a good reason for this. Rather than sell their homes when they move or downsize, more owners are choosing to rent them out instead, reaping immediate cash flow as well as tax and borrowing benefits.
It’s easier than ever to be a landlord.
Since 2008 we’ve seen the number of so-called "do-it-yourself (DIY) landlords" increase by nearly 30 percent, driven by new rental platforms like Airbnb and the arrival of technology tools that make being a landlord easier than it was in the past.
Amassing a real estate portfolio has long been a stable and effective way to grow your wealth. Is there any wonder why owners don’t want to sell?
But, it isn’t without challenges.
From problem tenants to maintenance headaches, to the risk of financial loss, owning rental property can be a full-time job. Here are a few suggestions to make life easier for potential DIY landlords when getting into the market.
Don’t buy what you already own.
Purchasing real estate can be expensive. From inspections to agent fees, to closing costs, simply processing the transaction of buying a rental home can add up quickly. Why not just rent out your current house, rather than shop for a home to rent out? Your financing is all set up, there will be no closing costs to pay and you’ll save on commission fees. What’s more, you already know what the house has been through. You know the maintenance history and what work has been done recently. You know exactly what you’re getting into and can budget for ongoing maintenance accordingly.
Understand your primary tax exemption.
This is an advantage written into the tax code that effectively exempts up to $500,000 from capital gains tax when you sell your home, provided you’ve lived in the home for at least two years. In other words, a new landlord can rent out their current house, buy a new one, and then after two years, they’ll be able to sell it (or both) free of capital gains while building a nice little rental business, all while both properties continue to appreciate.
Location still matters (a lot).
It’s cliché, but location really does matter in real estate. For landlords, it’s especially important, because attracting tenants to your property is job one, and renters have the luxury of picking and choosing based on location since they aren’t tied down with their own mortgages. This is another good reason to start by renting out your existing house. You already know the area. You already know the neighborhood. You understand what the market for your property is going to be because you were part of that market yourself when you bought in the first place.
Your mortgage is an asset, not a liability.
Many people grow up thinking of debt as a bad thing. And, when not handled carefully, that can be very true. But, in the case of real estate, the reality is actually the opposite. A mortgage on a rental property is an asset because it’s helping to create new income from that investment property. Now you have additional income that is paying for the mortgage.
The real estate market is tight and looks to get even tighter, in part because of the many financial advantages that DIY landlords enjoy. In fact, the system is all but set up to encourage homeowners to become landlords by treating them as quasi-small businesses with all of the benefits that designation entails.
It’s not a cake walk, but those that know how to navigate the potential pitfalls of the rental market will be able to build solid real estate portfolios, increase their borrowing power and grow their wealth exponentially over time.
December 14, 2018 at 05:27PM