Is Your Rental Real Estate Investment Still holding strong?
Over the course of time, the effectiveness of certain things is to fade away. This generic rule is also applied to the real estate industry. Here, you might think that the property you bought ten years ago is still making your enough money but you might be wrong. That rental property that made you money 10 years ago might not be doing the same now. The purpose of this article is to help you access your rental real estate investments.
Benefits of a rental real estate
For starters, let’s look at the four financial benefits of investing in a rental real estate deal:
- Cash flow.
- Principal reduction
- Income tax savings
- Appreciation
Keep an eye on your ROI
Let us go with an example and try to understand how the ROI works in rental real estate properties. Assume you bought a house 16 years ago. Priced at $70,000, you paid the initial $10,000 and borrowed the rest. Now, whatever your goals were it is assumed that like every investor you wanted the best possible outcome for your investment.
Supposedly, the principal reduction and tax savings were $1,800 a year, which accounted for an 18% earning on your investment! Looking at the property after 16 years, the total appreciation is now $120,000. The cash flow is not at $5,000 and a total of $7,000 with principal reduction included. After keeping a property for a long period of time the depreciation deductions are reduced and as a result much of your income in now in the tax bracket. You might still be making good money but is it to be considered profit?
You must look at Today’s ROI
Continuing with the above stated example, it is important to realize that your initial investment was more than $10,000. This can also be called “net equity”.
Mortgage has been paid and at the same time your property has increased its value. If sold, you will gain$80,000. Now, the investment you made is around $80,000 and your annual return is $5,600. This happens to be 7% ROI.
Moving your equity:
Moving your equity is a tough decision to make, if the owned property was kept by you for a long time. Still, we have listed some way through which you can move you equity:
- Sell: sell your rental real estate and move on to buy another one.
- Refinance: you can use the loan proceeds received through refinancing to buy a new property.
- Exchange: this is considered to be the best method to move equity. Your entire $80,000 equity can be transferred elsewhere without any tax implications.
Investing in rental real estate is not that simple. You need to educate yourself about the ways of the world in this sector. Remember, to bifurcate and keep a close eye on your ROIs. Similarly, when you decide that time is up for a certain property, move your equity by exchanging. This can save you taxes and add to your wealth.