If you’re on the fence about whether or not to get into the Houston real estate market as a rental property investor, it’s important to consider all of your options. You should also weigh the pros and cons – accounting for both the benefits and risks.
In this blog post, we’re going to specifically focus on five big benefits.
One of the most appealing aspects of owning single-family rental properties is the consistent monthly income they generate. It’s predictable money that you can count on every single month, regardless of how the economy or stock market is doing.
Rent payments can provide a reliable source of cash flow that helps cover the mortgage, property taxes, maintenance costs, and potentially still leaves a tidy sum for your pocket. Unlike stocks and bonds, which can fluctuate wildly in value, rental income tends to be stable and predictable, making it an attractive option for investors seeking regular earnings.
While the immediate and recurring monthly cash flow is certainly the part that gets a lot of people excited, there’s also the potential that a property you buy today could be worth significantly more in five, 10, or 15 years.
Over time, real estate typically appreciates in value, which can significantly enhance your investment’s worth. Single-family homes, in particular, have a strong track record of appreciation due to supply, demand, and the finite amount of real estate that’s available in any given area.
As the property’s value grows, so does your equity, offering the possibility of substantial financial gain when you decide to sell. This appreciation can outpace inflation and contribute to building your wealth, especially in thriving housing markets.
As a rental property owner, you’re entitled to deduct various expenses related to the operation and maintenance of the property. These expenses include mortgage interest, which often constitutes a significant portion of your yearly payments, especially in the early years of the mortgage. Property taxes, insurance premiums, and maintenance costs are also deductible. Additionally, if you hire a property manager or pay for services like landscaping or repairs, these costs can be deducted as well.
Arguably the biggest tax benefit is depreciation, which is a non-cash deduction that allows you to reduce your taxable income based on the presumed wear and tear of the rental property over time. Unlike other expenses, depreciation doesn’t require an out-of-pocket cost each year, yet it can significantly lower your tax liability.
Here’s how it works: The cost of the property (excluding the land, which does not depreciate) is spread out over its useful life, as determined by the IRS. For residential rental properties, this period is typically 27.5 years. Each year, you can deduct a portion of the property’s value from your taxable income, which effectively reduces the amount of tax you owe.
For example, if you purchase a rental property for $275,000 (excluding the land value), you could depreciate $10,000 each year ($275,000 divided by 27.5 years). This deduction can offset the rental income you receive, thereby lowering your overall tax burden.
One of the underrated perks of owning Houston rental properties as investments is that you have a significant amount of control over the management of these investments. This stands in stark contrast to other types of investments that you might have on Wall Street.
If you own 1,000 shares of Coca-Cola, you don’t really have any say over how the company is managed. They aren’t calling to consult with you before launching a new marketing campaign, buying a new manufacturing plant, or coming out with a new drink line. In other words, while you technically have voting rights as a stockholder, you have basically zero control or influence over the underlying asset – the company. If the company’s leaders decide to make poor decisions that send the stock price stumbling by 30 percent overnight, you’re simply at their mercy.
With real estate, you have far more control over the underlying asset – the land and single-family home that sits on top of it. This doesn’t mean there aren’t factors outside of your control (like economic policies, market conditions, pandemics, etc.), but there are plenty that you can control.
As the property owner, you make decisions about who to rent to, how much to charge in rent, and when to sell or make improvements. This hands-on management can lead to better outcomes, as you can directly influence the property’s condition, tenant satisfaction, and ultimately, its financial performance. Plus, you can choose properties that align with your investment goals, risk tolerance, and financial planning.
We often talk about the idea of diversification in the world of investing; however, for most people, they’re simply talking about diversifying within a traditional asset class. Take stocks, for example. While you can certainly diversify within different sectors – technology, health, energy, etc. – you’re still in the same asset class of “stocks.” With real estate, you’re able to diversify into a totally different asset class. And even within this class, there are incredibly unique opportunities.
Adding real estate to your portfolio gives you a more resilient and balanced portfolio that’s tied to something tangible. And unlike stocks – which are totally fine to own, by the way – real estate has an actual tangible asset attached to it. Plus, on top of all that, there’s the fact that real estate tends to perform well in recessionary markets when other traditional investments are suffering.
Real estate often moves counter to the stock market, meaning when stock prices are down, real estate values or rental demand may not be as negatively affected. This counter-cyclical nature can protect your portfolio against significant downturns in any single market. During times when the stock market is underperforming, Houston rental properties can continue generating income, offering a buffer that stabilizes your overall investment returns.
Real estate investments, particularly rental properties, are considered a hedge against inflation. When inflation rises, property values and rents typically increase as well. This means the income from your rental properties can grow over time, maintaining or even enhancing its real value in the face of inflationary pressures. This makes real estate an attractive component of a diversified investment portfolio, especially in inflationary economies.
At Green Residential, we believe in the power of real estate to help Houston-area families, landlords, and investors build wealth while providing housing for those in the local community. If you’re looking for a way to streamline your investments by outsourcing all of the typical headaches (like finding tenants, collecting rent checks, and dealing with repairs), we’d be happy to assist. Our comprehensive Houston rental property management services are widely considered to be the best in the area.
Contact us today to learn more!
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