Many investors want to know what makes a rental investment worth it when investing in real estate–appreciation or cash flow? While both have several benefits, there are a few critical points for investors to focus on. For example, it’s important to create regular cash flow while also looking at appreciation. Luckily, there are several ways to make money with a rental property. Here’s how you can focus on rental property cash flow and some of the best investment methods for your business.
Appreciation vs. Rental Property Cash Flow
While rental property cash flow is typically the number one goal for landlords, it’s not the only financial gain associated with rental properties. Something great about rental investments is you don’t have to choose just one way to benefit–there are several! So here is what landlords should know about appreciation and cash flow.
What is Appreciation?
Rental property appreciation occurs when a property increases in value over some time. Increasing home value means increased equity, which landlords can do in several ways. For example, one way to create a ton of equity is by forcing appreciation. Forced appreciation adds value to a property through upgrades, getting a good deal, or adding income.
However, if you’re planning to invest for appreciation, it’s essential to research the rental market diligently. After all, you want to have a good understanding of where people are looking to live. Additionally, it’s hard to predict a market crash, so landlords need to stay up-to-date on local housing information.
Rental Property Cash Flow
Cash flow offers consistent cash payments to investors, typically in the form of rent. Sometimes investors can benefit from both appreciation and cash flow. However, commonly, they need to choose one investment strategy since income is extremely dependent on location. For example, you could have a property with high cash flow in an area with low appreciation and vice versa.
That said, most investors focus on cash flow for their business. After all, a positive balance can cover several expenses such as mortgage payments, property management, and insurance. Additionally, rental property cash flow can offer more versatility and financial freedom by earning a steady income.
Should You Invest to Flip or Invest to Rent?
The first step in finding an investment strategy is figuring out your financial goals. Are you looking to obtain passive income or active income? Many investors are stuck between two investment strategies–flipping or renting. Here are some of the pros and cons of each approach.
Investing in Real Estate to Flip
This strategy isn’t necessarily considered investing when it comes to flipping properties. Instead, since you’re working to earn money, it’s more of an active income strategy. Some of the pros include quicker returns on your investment and less management necessary. After all, once you fix up the property, it’s time to sell it right away, resulting in a quick return.
However, like any investment strategy, there are also a few cons. For example, when you flip real estate, you do not end up with consistent income. Instead, you’ll likely need a steady income from another career. As such, it’s important to realize that once you’ve completed a property flip, you’re no longer receiving income.
Another con that comes with flipping properties is taxes. When buying and selling a property, closing costs can add up and easily cut into profits. Look up tax rates depending on whether your property is a short-term gain or long-term capital gain and file taxes accordingly.
Investing in Real Estate to Rent
Investing in rental properties is more of a passive income strategy. While you can earn large sums of active income from flipping a property, you can slowly generate passive income with a rental property.
Rental investors are great because they allow investors to earn consistent monthly income, which can generate financial independence and long-term wealth. Additionally, rentals typically increase in value over time. So, the longer you hold onto your rental property, the more it will be worth in the future. Finally, one large benefit of retinal properties is the tax benefits. Landlords can deduct several rental expenses each year on their tax returns, resulting in fewer tax fees and more financial gains.
Some of the downsides of renting are the risk of vacancies and lack of management. After all, if you don’t have tenants living in your rentals, you’re not generating any income. Additionally, you could lose tenants if you have too many properties to manage and don’t have the time to do it yourself. That said, hiring property management in Baltimore can help increase tenant retention rates and improve your rental business.
Selling Your Property to Reinvest
Most landlords are continuously looking for ways to increase cash flow. One way to do so is by reinvesting your properties. Using a 1031 exchange form to buy another rental once you sell one is a great way to produce more cash flow. Ultimately, investors can avoid paying capital gains tax by reinvesting the proceeds into another rental property. Section 1031 of the tax code allows investors to reinvest the proceeds from one rental home into another like-kind property. Then, taxes are paid after the exchange has taken place.
That said, investors should know how to fill out a 1031 exchange form, which documents the exchanging of properties. If you have completed more than one exchange, investors need to fill one out for each property. Additionally, investors need to note that they only have 45 days to find a similar property after the original property sale date. Then, they must close on the home within 180 days.
How Can Refinancing Increase Cashflow?
Another way you can increase equity on your rental properties is by refinancing them. Refinancing means putting a new loan on your property that replaces your old loan. That said, you can also use refinancing on rentals owned free and clear, even though there is no loan to replace.
Getting a larger loan for a property won’t necessarily increase cash flow. In fact, cash flow may decrease if the loan payments are higher than before. However, landlords can use cash left over from the refinance to buy more rentals, ultimately increasing cash flow.
Get the Most From Your Rental Business
Pondering the benefits and downsides of real estate investing could take all day. With so many aspects to focus on, it’s hard to determine the best thing about owning real estate. However, several investors are in it for the rental property cash flow and appreciation benefits. While both are great investment strategies, it’s essential to pick one and focus on it. Ultimately, it all depends on your investment goals!
Luckily, you don’t have to plan it out yourself. If you need assistance running your rental business, you’re not alone. Bay Property Management Group has the professionalism and proficiency to help your rental property investment business succeed. Contact us today if you need management services in Baltimore, Philadelphia, Northern Virginia, or Washington DC.
