Top 5 Reasons for Buying or Not Buying A Rental Property

Depends on your specific situation and personal preference, there may be many reasons why you want to buy a piece of real estate. In general for rental property investment, here are the top 5 reasons why people want to buy or hold off their purchase of a certain property.

1. Cashflow: Cash in - Cash Out

This is the factor many new investors care the most. Whether they have a positive cashflow i.e. the rent from their tenant can cover their month’s costs of that property (tax, insurance, mortgage, maintenance, pm fees and etc) make or break a deal. For some experienced investors, based on their portfolio composition and regional distribution, they will acquire properties with negative cash flow in the beginning and excel in other factors. But for new starters, in particular, those who do not have a lot of cash, cash flow is one of the most important factors for their decision.

2. Equity Capture: Market Price of that Property - Purchase Price

Equity capture is the difference between the actual market value of a property and the price you paid to acquire it. When the seller is in a rush to sell or if you are a great negotiator, you can purchase a property below its market value. The difference is the equity capture at the transaction. You won’t make money in a traditional sense that has more money in your bank account. But in general, you have gained equity from the time you purchased that property, provided the market did not tank immediately.

3. Debt Pay Down: Tenant rent vs. Morgage Payment

For many rental property investors, one of the questions, if not the first question comes to their mind, is that how much they can rent that property for? Can the tenant rent cover the mortgage? Say if you have a 15-year mortgage and you have a tenant who lives there for 15 years. Their rent can cover the expenses especially the mortgages. Basically you have no extra expense apart from the downpayment after you purchased the property. In a way, the tenant bought that property for you.

4. Depreciation (In general over 27.5 years)

On average, your property can be depreciated among 27.5 years for tax purpose. This can help you offset any income you have during those years and reduce your tax payment. in some case, you may shorten the deprecation years thus increase your tax deducts. I am not a financial advisor so you’d better consult your accountant for details.

5. Appreciation

Personally, this is my biggest reason to own real estate. Statistically, properties on the west and east coast can double their value around 7 years. properties in the heartland of American take longer around 12-15 years. This is more valuable than cashflows. If you are more concerned with your runway, pay more attention to your cashflow. However, if you are playing the long game, emphasize more on the appreciation. A good investor could find the balance of the two and carefully plan out their investment strategy and portfolio composition.

All in all, it is not wise to only use one or two factors to decide an investment. You can put different weights for different weights and constricted your own formula or weighted score of a certain property. It is generally advised to take into many factors into consideration all together to reach a final conclusion.