It's difficult to deny that the property market has been behaving strangely of late. According to the Federal Housing Finance Agency, housing prices in the United States grew 17.4 percent from October 2020 to October 2021. According to the Federal Reserve Economic Data (FRED), average home prices reached an all-time high of $477,900 in the fourth quarter of 2021.
Many would-be homebuyers and investors have been waiting for a downturn that has yet to materialize. With these ever-increasing trends in property prices, as well as the effects of inflation and supply chain concerns, one has to wonder: Is it wise to invest in rental houses in 2022? Is it still possible for landlords to make a profit?
In 2022, why is a rental property a good investment?
Many personal aspects influence whether or not a rental property is a suitable investment, one of which is your own financial condition. Having said that, even with the housing market at its peak, there are numerous reasons to consider investing in rental property.
Here are 11 compelling reasons why you should think about investing in real estate right now, and how it might benefit you and your future.
Obtain rental income.
In both the long and short term, there are two methods to profit from a rental property.
Rental revenue is the first — and possibly most important — way to profit from a rental property since it puts money in your pocket right now. This is the difference between the PITI (principal, interest, taxes, and insurance) on your property and the amount you charge renters during an occupancy period. The cash flow generated by these monthly rent payments can be used to generate passive income and cash flow on a monthly basis.
According to a recent research by Arrived Homes, Arrived rental houses earned an average annualized dividend return of 5.6 percent. This means that for every $1,000 invested, you'll get $56 in annual rental income.
Profit from your property's equity.
Long-term gains are the second way that rental property can produce money for an investor. This happens when the value of the property rises over time.
If and when you decide to sell that property in the future, you may be able to realize a capital gain on the sale price when compared to the purchase price. This may represent tens or even hundreds of thousands of dollars in returns over the life of your long-term investment, depending on how long you keep that rental home and how the real estate market performs between your purchase and sell dates.
According to the same Arrived Homes report stated above, rental property owners may expect a 6.1 percent annual increase in property value over a ten-year period. When combined with the average annualized dividend return of 5.6 percent, investors have experienced total annual gain of 11.7 percent during the same 10-year period.
This means that if you invest $1,000, you'll get an average annual return of $117 from dividend income and property value growth. Over the duration of a ten-year investment period, that $1,000 may yield a total return of $1,170 on average.
Take advantage of tax advantages:
There are numerous tax advantages to owning real estate, particularly if the property is used as a rental property. Each one has the potential to save money for real estate investors in the short and long run. Here are some of the biggest tax advantages you could get this year if you invest in real estate.
Deductions are available for operating expenses.
Tax deductions are available for all costs associated with managing, maintaining, and even promoting your rental property. These deductions reduce your overall taxable income, lowering your federal and/or state tax liability.
The following are allowed deductions:
⦁ Repairs
⦁ Maintenance
⦁ Supplies
⦁ Landscaping/property upkeep costs
⦁ Advertising
⦁ Property management company fees
⦁ Property taxes
⦁ Cleaning fees
⦁ Utilities paid by the owner
⦁ Homeowners and landlord insurance premiums and more.
You can deduct your own relevant charges.
You may spend certain fees as a rental property investor simply to own and manage the property. You may be allowed to deduct certain expenses at tax time, depending on what they are.
Common deductions include:
You can often claim those miles and/or actual travel charges if you visit to the property to perform repairs, display the residence, changeover tenants, and so on.
Expenses for a dedicated home office – If you manage your rental properties from a dedicated home office, you may be eligible to deduct proportionate costs for that space. This can include things like rent or mortgage payments, insurance, and even utilities.
Linked courses or continuing education – You may be allowed to deduct the cost of certain courses, certifications, or memberships in clubs/organizations related to your real estate investment property.
The interest on a mortgage is tax-deductible.
Any interest you pay to your lender on your rental property's mortgage loan is tax-deductible.
Depreciation might be taken on an annual basis.
To account for regular wear and tear over time, the IRS enables you to deduct an annual depreciation on the upgraded piece of your rental property (the dwelling). This depreciation begins the first year the property is put into operation, or rented out, and can run up to 27.5 years in the case of residential rentals.
Capital gains may be deferred in the future.
You'll owe the IRS taxes on your capital gains, or how much profit you gained, if and when you sell your rental property. These taxes are delayed if you utilize the proceeds to purchase a "like-kind" sort of investment property.
This technique, known as a 1031 Exchange, allows investors to sell a rental property and then buy another without incurring a large capital gains tax bill. To be eligible for the exemption, the property must fall into one of the following categories: You'll need to buy a new single-family rental home if you sell your single-family home. You'll need to buy a new apartment building if you sell your current one.
To qualify, like-kind exchanges must be completed within 180 days following the sale of the first property. Within 45 days following the sale of the exchanged property, you must at least identify suitable replacement properties in writing.
Rental revenue is exempt from FICA.
According to the IRS, the income received from a rental property is considered passive, at least for the average investor. As a result, it is normally exempt from FICA (Federal Insurance Contributions Act), which is now fixed at 15.3 percent.
Instead, this income is typically reported on your Form 1040 and taxed in accordance with your individual tax brackets.
Generate money for future generations.
Real estate may readily build generational wealth because rental property is transferable. There are other advantages to doing so as well.
When you die, the property you own today can be passed on to your loved ones as part of your estate. Most of the time, this will also erase any capital gains taxes you would have paid if you had sold the property while still alive. Because inherited real estate (including rentals) is valued on a step-up basis as of the day you pass away, this is the case.
Assume you bought a home for $100,000 and it increased in value to $500,000 over the course of ten years. If you sold the house, you'd be responsible for $400,000 in capital gains taxes, calculated from the original basis (the house's value when you bought it). If you leave that property to your loved ones when you die, however, the basis adjusts correspondingly; your beneficiaries are only accountable for any gains over $500,000, as that was the property's value on the day you left it to them.
Maintain some control over your investment.
Unlike stocks, which place your money in the hands of another company, real estate investing empowers you to control your own financial destiny. You have the option of selecting your investment area, rental market, and even property kind. You can also set your own rent rates, manage your own tenants, and make any modifications or upgrades you choose to the property.
While you have no control over the real estate market as a whole, owning real estate property provides you some control over your money.
Invest for a lower return.
Before you could go into the rental property business, you had to have the money to buy, advertise, and maintain a rental property. Purchasing rental properties required putting aside money for a down payment, qualifying for a mortgage loan, and demonstrating that you had the financial means to bear the risk of vacancies or unforeseen repairs.
All of this was on top of the costs of purchasing your principal residence.
Real estate investing, on the other hand, is now accessible to the average individual, even if they don't have a lot of cash on hand. Companies like Arrived Homes make it simple for investors to invest in rental property and start earning passive income with whatever amount of money they have on hand... even if it's just a few hundred dollars at a time.
Diversify your investing portfolio.
You should never put all of your eggs in one basket, as the old adage says. This rule still holds true when it comes to financial methods.
At different times, distinct investment markets will ebb and flow. The stock market, for example, may be in a downward spiral while the real estate market is booming. You can ensure that your wealth is well-distributed and can continue to grow no matter which market you're in by diversifying your investments.
Stay away from the turbulence.
Let's face it: there is no such thing as a risk-free investment. There is always the risk that your investment will lose value due to reasons beyond your control, no matter where you put your money.
In comparison to, instance, investing in the stock market, real estate is generally considered a low-volatility investment. This is due to the fact that real estate does not undergo the same sharp upswings and downturns that equities do. While there are exceptions and unanticipated real estate market activity, investors rarely have to worry about "timing the market" in the same manner they would when purchasing other securities.
Obtain quick financial assistance.
You're usually out of luck if you don't have enough money to buy stocks, bonds, or other investments. And you could be missing out on significant (and potentially compounded) gain during the time it takes you to accumulate that money. However, with real estate, you have the option of financing your new investment, which is generally done at a reasonable rate.
Home financing is simple, inexpensive, and even encouraged. There are numerous sorts of mortgage loans available, each tailored to a specific property type and value. Do you want to buy a small single-family house? Perhaps a multi-family residence is more your style. Or is it possible that the appropriate property for you is a high-priced luxury home?
There is finance available for any budget, financial status, or investment ambitions.
Of course, you'll need to meet the lender's income and credit score standards in order to finance your real estate investment. However, depending on their income and other personal characteristics, many applicants may be eligible for low-down-payment mortgage loans, down payment and closing cost help, and lower rates.
Inflation protection.
The United States saw an annual rate of inflation of 8.5 percent from March 2021 to March 2022. This is the highest rate of inflation since 1981, and it has had an impact on everything from interest rates to food and gas prices, among other things.
With all other circumstances remaining constant, the wealth you have today will be worth a little less in the future due to inflation. For example, if you want to retire with $2 million, you'll need to factor in inflation and how far that money will bring you in your later years.
Fortunately, in most circumstances, real estate acts as a natural inflation hedge. In reality, a rise in inflation may help real estate investments, as property prices (and rental values) tend to correlate.
Choose from several possibilities.
Regardless matter the form of property most interests you, there are numerous options to invest in. There are alternatives available for commercial real estate, single-family investment homes, multi-family properties/apartments, and even industrial buildings.
Plus, because to crowdfunding platforms, real estate investment trusts (REITs), and investment platforms like Arrived, investors have a lot of options when it comes to their actual investment.
You can invest in a commercial REIT even if you don't have the funds to buy a retail mall outright. If you want to invest in rental real estate but can't (or don't want to) put down hundreds of thousands of dollars, fractional ownership can provide you with a passive return on investment and growth in the meantime.
Investing in rental houses is simple.
Every investor's circumstance is different, and only you can decide whether real estate investing is the best option for you right now.
Rental homes, on the other hand, are still a smart investment in 2022, just as they have been in the past. Rental property is a solid bet for many people because of the tax benefits and passive income it provides, the way it helps investors hedge against market volatility and inflation, and the fact that it gives them control over their money.
Although residential real estate has been the best long-term investment in modern history, many people are unable to participate due to operational difficulties and bigger upfront cash requirements. Our purpose at Arrived is to enable people throughout the world to build wealth on their own terms by investing in modern real estate.
You may now invest in real estate, receive rental income, and grow equity through house appreciation while we take care of everything else. Start investing in real estate today by looking through available properties.
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