Many people dream of one day gaining financial freedom and no longer needing to work or live from paycheck to paycheck. While there are numerous options you can explore when attempting to gain financial freedom, investing in rental real estate may be your best option. With enough rental properties that provide you with positive cash flow, you can replace your entire income.

One mistake that potential investors often make is believing that investing in real estate requires a considerable sum of money. There are, however, many methods you can use to make real estate investments. Once you invest in your first property, you should begin benefiting from this investment almost immediately. The following guide explores the many advantages of putting your money into rental real estate.

Understanding Passive Income

Unless you actively manage the properties you invest in, rental real estate gives you the opportunity to earn passive income, which means that you don’t do anything to make money. Once you invest in a piece of rental real estate, you can earn passive income by collecting rent and waiting until the property appreciates in value. Passive income is available as a monthly cash flow instead of an hourly paycheck. If you’d like to gain financial freedom, having at least some passive income is highly advantageous.

Gaining Financial Freedom with Passive Income

To understand the benefits of gaining financial freedom, ask yourself how you would feel if you no longer needed to work more than 40 hours every week just to put food on your table or make your monthly mortgage payments. With enough rental properties in your portfolio, you might never again need to worry about whether you can pay your bills on time.

The passive income you earn from your rental investments can be used to further your goals, which means that you wouldn’t be working for money. Instead of focusing most of your time and energy on a job, you could spend time visiting different countries or learning new hobbies. The road to financial freedom can start with your first rental property investment.

Advantages of Owning Rental Property

The benefits you gain from investing in rental real estate are available even after your first investment. However, investing in multiple rental properties may be necessary if you’re looking to replace all of your current income. Since rental properties bring in rent payments every month, you earn passive income on a monthly basis. Here are the many benefits of owning rental property.

Numerous Ways to Make Money

There are many ways to make money once you add one or more rental properties to your investment portfolio, the primary of which occurs through passive income. You can use this money to pay your bills, save for retirement, or take vacations on a regular basis. You can calculate a rental property’s passive income by subtracting all property-related expenses from the rental payments you receive each month.

Let’s say you’re renting out a single-family home for $2,000 with expenses at $1,500. In this scenario, you’ll earn $500 in passive income every month. If you were to rent the home out for $2,000 but pay $2,500 in expenses every month, you would lose money on the property. If a rental property is performing well, you should have a positive cash flow.

While gaining the ability to make passive income is the primary advantage of investing in rental real estate, you can also take advantage of equity capture. If the property you invest in is worth $200,000 but you acquire it for just $160,000, you’d have $40,000 in immediate equity. You can then focus on refinancing the property, which gives you access to the equity you’ve built up. With this equity in hand, you can buy other rental properties.

You may be able to earn more money from your property via market appreciation as well. Since the 2007-2008 financial crisis, property values have steadily increased with only momentary dips here and there. If your rental property increases in value by $10,000 over a period of five years, you’ll have $10,000 more in equity, which will be available to you if you eventually sell the property.

You can also choose to increase the property’s value by making certain renovations and improvements. Whether you choose to repaint the walls or install high-quality granite countertops, the renovations you make can directly add value and increase your equity.

Sizable Tax Deductions

Investing in rental real estate also gives you access to sizable tax deductions, which makes it easy for you to save more money on your rental properties. When you purchase a rental property, you can run it like a business and write off all expenses on your annual tax return.

Let’s say that you have a smartphone you solely use to speak with property managers and make sure that your rental properties are effectively maintained. You should be able to write off the costs associated with this phone. Traveling to another state or country to purchase rental real estate can be written off as well. Your accountant can help you fill out your tax return in a manner that maximizes these deductions.

An additional tax benefit available to you involves a 1031 exchange, which allows you to defer capital gains taxes from the sale of one rental property if you immediately use the money you gain from the sale to purchase another rental property. Taxes are then deferred until you sell the property or engage in another 1031 exchange.

You Effectively Own a Business

A clear advantage of owning rental property is that you effectively own a business, which means that you gain all the protections and benefits that come with business ownership. If you instead choose to invest your money in company stocks, you won’t gain any protection from losses. Buying a rental property gives you access to everything from landlord insurance and umbrella insurance to homeowners insurance.

It’s also possible for your business to grow by adding more rental properties to your portfolio over time. The process of owning rental real estate becomes easier once you begin to purchase additional properties. You should learn from any mistakes you make with your first investment property after buying more properties.

Additional Advantages

There are many other benefits of investing in rental real estate, which extend to everything from generational wealth to flexibility when you’re making future investments.

Build Generational Wealth

If you’re looking to make enough money to support your family even after you’re gone, it’s possible to do so with aggressive financial goals that focus on building generational wealth.

In the event that you own rental real estate, you can pass any of your properties down to your children, which means that they will begin to make passive income every month. You can also teach them how to manage these properties before you pass away.

More Control

Investing in rental real estate gives you full control over your time and properties as well. When you work at a typical office job, you’ll have a boss who decides what your salary is and if you get a bonus this year. If you receive your salary based on the number of hours you work, not working for one hour reduces your take-home pay. When you want to go on vacation, you’ll need to ask for time off work or use up your vacation days. In this scenario, you don’t have much control over your life or how you make your money.

Once you’ve added enough rental properties to your portfolio, you’ll no longer need to work, which ensures that you have full control over your time, life, and the properties you invest in. When you invest in stocks, you’re only able to control when you buy or sell these stocks. If the company you invest in makes poor decisions that cause you to lose money, there’s not much you can do.

Almost Everything Is Automated

As touched upon previously, nearly all aspects of the rental properties you own are automated if you hire a property management company to handle rent collection and other aspects of managing a rental property. The only work you’ll be tasked with doing is speaking with your property managers and occasionally visiting the properties to make sure that everything’s going well.

Once you’ve freed up most of your time, you won’t need to work around a busy schedule just to find enough time to look at another rental property you’re interested in. If you make enough money to replace your current income, you could hire bookkeepers, realtors, contractors, and other professionals to effectively manage your income and the rental properties you buy. With the right approach, the work you do should be limited.

Use Leverage

Buying rental properties also allows you to benefit from leverage, which means that you borrow a certain amount of money from other individuals to make your investments. Let’s say that you put $15,000 into a rental property before eventually refinancing the property and pulling out the equity to purchase another property. You could then choose to refinance all the additional properties you buy until you’re able to buy rental real estate solely with cash.

Investment Is Stable

A clear advantage of investing in real estate is that you gain a stable investment. When the market crashed in 2008, real estate values fell precipitously for a brief period. Since then, however, values have risen consistently regardless of what happens in the market. Real estate is often used as a hedge against inflation because home values are usually stable even when the overall market is performing poorly. When inflation is high, property values can still be high.

Added Flexibility

Rental real estate offers more flexibility. For instance, you can choose to move into any property you own. If you purchase a single-family home and rent it out to other tenants, you can eventually decide to move in yourself after a tenant moves out. After a year of living there, you could then decide to rent it out again or sell it altogether. Owning rental real estate gives you numerous options when managing the property.

Helps with Diversification

Buying rental real estate is a great way to diversify your investment portfolio. While stocks, bonds, and other instruments typically move in accordance with the broader market, real estate tends to appreciate, which can help balance your portfolio when a couple of your other investments drop in value.

Owning rental property provides you with dozens of fantastic benefits that aren’t possible with other types of investments. Here at Rent to Retirement, we can help you navigate this process and find the perfect property to add to your portfolio.