Are Rental Properties a Good Investment?

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It’s hard to escape the fact that the housing market has been doing some crazy things as of late. From October 2020 to October 2021, for instance, housing prices in the U.S. rose 17.4%, according to the Federal Housing Finance Agency. Federal Reserve Economic Data (FRED) numbers also show that average home prices rose to an all-time high of $477,900 in Q4 of 2021.

Many would-be homebuyers and investors have found themselves holding out for a downturn that simply has not arrived. So, with these ever-rising trends in home costs, and the effects of both inflation and supply chain concerns, one has to wonder: Are rental properties a good investment in 2022? And can landlords still make money with housing prices where they are?

Why rental property is a good investment in 2022  

Whether or not a rental property is a good investment depends on many personal factors, one of which is your own financial situation. With that said, there are many reasons to still consider investing in rental property, even with a housing market at its current height. 

Here are 11 great reasons why you might want to consider investing in real estate right now, and how this can be a good investment for you and your future.

Generate rental income

There are two ways that you can make money from a rental property in both the long- and short-term. 

The first way to make money from a rental property — and perhaps the most impactful, as it puts cash in your pocket today — is through rental income. This represents the net gain between your property’s PITI (principal, interest, taxes, and insurance) and how much you charge renters during an occupancy period. The cash return from these monthly rent payments can be a source of passive income and cash flow each and every month.

For example, a 2021 study conducted by Arrived Homes found that Arrived rental properties received an average annualized dividend return of 5.6%. This means that for every $1,000 invested, you’d receive an average yearly rental income of $56. 

Earn property equity returns 

The second way that rental property can make money for an investor is through long-term gains. This occurs when the property’s value appreciates over time. 

If and when you go to sell that property in the future, you may recognize a capital gain on the sales value compared to its original purchase price. Depending on how long you hold on to that rental home and how the real estate market performs between your purchase and sales dates, this could mean tens or even hundreds of thousands of dollars in gains over the course of your long-term investment. 

Based on the same Arrived Homes study mentioned above, rental property owners could potentially recognize an average property value growth of 6.1% annually over 10 years. Combined with the average annualized dividend return of 5.6%, this equates to a total average annual growth of 11.7% for investors over that same 10-year timeframe. 

This means that for every $1,000 invested, you’d see an average return of $117 per year between dividend income and overall property value growth. Over the course of a 10-year investment period, that $1,000 has the potential to net you a total return of $1,170, on average.

Enjoy tax benefits 

There are many excellent tax benefits that come with owning real estate, especially if that property is used as a rental home. Each has the potential to save real estate investors money both in the short- and long-term. Here are some of the top tax benefits that you may enjoy if you invest in real estate this year.

Operating costs are deductible

Any necessary costs involved with managing, maintaining, and even marketing your rental property can be deducted at tax time. These deductions serve to reduce your overall taxable income, saving you money on your federal and/or state tax burden. 

Allowed deductions include:

  • 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

As a rental property investor, there are certain expenses you may incur just to own and manage the property. Depending on what these expenses are, you may also be able to deduct them come tax time. 

Common deductions include:

  • Travel expenses — If you travel to the property to make repairs, show the home, changeover tenants, etc., you are generally allowed to claim those miles and/or actual travel costs.
  • Home office expenses — If you manage your rental properties from a dedicated home office, you may be able to deduct proportionate expenses related to that space. This can include mortgage payments or rent, insurance, and even utilities.
  • Related courses or continuing education — If you choose to take certain courses, get related certifications, or join certain clubs/organizations related to your real estate investment property, you may be able to deduct the cost.

Mortgage interest is deductible 

Any interest you pay to your lender on the mortgage loan for your rental property is tax deductible at the end of the year. Other forms of interest may be deductible as well, including credit card interest on purchases made for the home.

Annual depreciation can be taken

The IRS allows you to take an annual depreciation on the improved portion of your rental property (the home) to account for normal wear and tear over time. This depreciation is allowed from the first year the property is put into service or rented out and can last for up to 27.5 years for residential rentals.

Future capital gains may be deferred

If and when you eventually sell your rental property, you will owe the IRS taxes on the capital gains or how much profit you made. However, if you use those proceeds to then purchase a “like-kind” type of investment property, these taxes are deferred.

Called a 1031 Exchange, this process allows investors to sell a rental property and then purchase a new one without getting saddled with a hefty capital gains tax bill. In order to qualify for the exemption, the property must fall into the same category: If you sell a single-family home, you’ll need to purchase a new single-family rental home. If you sell an apartment building, you’ll need to purchase a new apartment building.

Like-Kind exchanges must be finalized within 180 days after the close of the sale of the first property in order to qualify. You’ll also need to at least identify potential replacement properties in writing within 45 days of the sale of the exchanged property.

FICA does not apply to rental income

According to the IRS, the income earned from a rental property is considered passive, at least for the typical investor. As such, it is generally not subject to earned income self-employment taxes (FICA), which are currently set at 15.3%.

Instead, this income is generally added to your Form 1040 and taxed according to your personal brackets.

Create generational wealth

Because rental property is transferable, you can easily create generational wealth with real estate. There are many benefits to doing so, too.

The property that you own today can be passed to your loved ones as part of your estate when you die. In most cases, this can also eliminate the capital gains taxes that you yourself would have incurred if you’d sold the property while still alive. That’s because inherited real estate (including rentals) receives a step-up basis as of the day that you pass away.

Let’s say that you purchased a home for $100,000, and it appreciated to $500,000 over the course of 10 years. If you sold the property, you would be responsible for the taxes on $400,000 in capital gains, calculated from the original basis (the home’s value at the time you purchased it). However, if you pass that property on to your loved ones when you die, the basis adjusts accordingly; your beneficiaries would only be responsible for any gains above $500,000 since that was the property’s value on the day you passed it to them.

Maintain an element of control in your investment 

Unlike stocks, which put your investment funds at the mercy of another business, real estate investing allows you to take control of your own financial future. You can choose the location, rental market, and property type you want to invest in. You also have the power to set your own rent prices, manage your own tenants, and make whichever improvements or upgrades to the property that you wish.

While the real estate market as a whole is still out of your control, owning real estate property gives you some level of involvement in your money.

Invest for less

Once upon a time, you needed to have the funds available to purchase, market, and maintain a rental property before you could break into the business. Buying rental properties meant saving up for a down payment, qualifying for a mortgage loan, and proving that you had the income necessary to take on the risk of vacancies or unexpected repairs.

And all of that was on top of the expenses necessary to buy your primary residence.

Now, however, real estate investing is accessible to the average person, even if they don’t have large amounts of cash on hand to fund the purchase. Companies like Arrived Homes make it easy for investors to buy into a rental property and generate passive income, with whatever investment makes sense for their financial situation… even if that means just a few hundred dollars at a time.

Diversify your investments

As the old saying goes, you should never put all of your eggs into one basket. When it comes to investment strategies, this rule still applies.

Different investment markets will ebb and flow at different times. For example, the stock market might be in a death spiral while the real estate market is flourishing. By diversifying your investments, you can ensure that your wealth is well-distributed and can continue growing no matter your market.

Avoid volatility

Let’s face it: no investment is ever truly risk-free. No matter where you choose to park your wealth, there is the potential for your investment to lose value due to factors outside of your control.

With that said, real estate is generally considered a low-volatility investment compared with, say, investing in the stock market. That’s because real estate doesn’t experience the same sudden upswings and rapid downturns that stocks can. While there are exceptions and unexpected real estate market activity, investors don’t usually have to worry about “timing the market” the way they would buying other securities.

Get easy access to financing

You’re usually just out of luck if you don’t have the money available to buy stocks, bonds, or other investments. And in the time it takes you to save that money, you could be missing out on serious (and even compounded) growth. With real estate, though, you have the option to finance your new investment, often at a low cost. 

Financing a home is relatively easy, cheap, and even encouraged. Many types of mortgage loans are designed for properties of all types and values. Want to buy a modest single-family home? Maybe a multi-family home is more your style? Or perhaps, the right property for you is a luxury home with a high sticker price? 

No matter your budget, financial situation, or investment plans, there is financing to be found.

Of course, in order to finance your real estate investment, you’ll need to meet certain income and credit score requirements set by the lender. However, many borrowers may even qualify for low-down-payment mortgage loans, down payment ad closing cost assistance, and reduced rates based on their income and other personal factors.

Hedge against inflation 

From March 2021 to March 2022, the U.S. experienced a year-over-year tate of inflation equal to 8.5%. This is the highest inflation rate since 1981 and has affected everything from interest rates to food and gas prices.

Thanks to inflation, the wealth you have today will be worth a little bit less in the future, all other factors unchanged. So if you plan to retire with $2 million, for instance, you’ll need to account for inflation and how far that money will get you in your older years.

Thankfully, real estate has a way of naturally hedging against inflation in most cases. In fact, real estate investments may even benefit from a surge in inflation, as home prices (and rental values) tend to correspond.

Pick from a variety of options

There are so many different ways to invest, regardless of which type of property interests you most. Whether you are focused on commercial real estate, single-family investment homes, multi-family properties/apartments, or even industrial buildings, the options are out there. 

Plus, between crowdfunding platforms, real estate investment trusts (REITs), and investment platforms like Arrived, there is also a lot of flexibility for the investor in terms of their actual investment. 

Even if you don’t have the money to purchase a shopping mall on your own, you can buy into one with a commercial REIT. And if you’re looking to invest in rental real estate property but can’t (or don’t want) to tie up hundreds of thousands of dollars in the purchase of one, fractional ownership can grant you access to a passive return on investment and growth anyway.

Easily invest in rental properties

Every investor’s situation is unique, and only you can decide whether investing in real estate is the right decision for you at this exact time.

That said, rental properties are still a good investment in 2022, just like they have historically been. Thanks to the tax benefits and the passive income they offer, the way they help investors hedge against market volatility and inflation, and the fact that they allow investors control over their money, rental property is a good bet for many people.

While residential real estate has been the best long-run investment in modern history, operational headaches and larger upfront financial commitments prevent many people from participating. At Arrived, our mission is to empower the world to build wealth through modern real estate investing on their own terms.

Now, you can buy shares of properties, earn rental income, and build equity through home appreciation, all while we handle the rest. Browse through available properties to start investing in real estate today.