7 Reasons to Buy Investment Property in Denver
Without question, buying your own home has its perks.
There’s the little stuff, like being able to put up floating shelves without losing your security deposit and painting your kitchen whatever color you damn well please. Then, of course, there’s the bigger-deal, money-related stuff, like tax breaks and equity.
Just for funsies, let’s focus on the money things for a sec. If owning one place is a stepping stone toward financial freedom—and it most certainly is—what if you owned more than one?
Investment Property Basics
An investment property is real estate purchased for the purpose of generating additional income.
Most of the time, when people hear “investment property,” residential options come to mind: single-family homes, duplexes, apartment buildings, townhouses, or condos.
But you can also find investment opportunities in the commercial market (e.g., retail buildings and office space) and industrial market (e.g., warehouses and manufacturing buildings).
Benefits of Owning Investment Property
“Generating additional income” sounds lovely, doesn’t it? But let’s get more specific about how owning investment property can boost your financial position now and for the long haul.
#1 Cash Flow
As you know, landlords charge their tenants rent. So, when you’re the landlord, that rent is yours.
OK, some of it’s yours. Assuming you take out a loan to purchase the property, some of your rental income will go toward your mortgage payment. And some will go toward property tax, insurance, and maintenance costs.
But whatever’s left? You can do whatever you want with it.
Most people use these steady rent payments to pay back their investment faster, but you could also just keep it as an extra source of income.
#2 Tax Breaks
Although some of your rental income has to go toward rental-related expenses, those expenses are tax-deductible.
As a landlord, you can deduct:
Maintenance and repairs
Mortgage interest (but not the mortgage payments)
Credit card interest (if used for goods or services for the property)
Depreciation
Insurance premiums
Property tax
Utilities (if you pay them for your tenant)
Legal and professional fees
Travel to and from the property (in some cases)
#3 Appreciation
Especially if you choose a good property in a strategic location, your investment will grow in value (appreciate) over time. By how much? Well, in Denver, by quite a lot. Since 2000, Denver-area homes have appreciated by 141.99%. The U.S. average over that same time was just 4.3%.
Whoa, right? Now, obviously there are no guarantees, but investing in real estate has long been considered one of the safest ways to build wealth.
#4 Better Returns, Less Risk
Let’s say Denver’s real estate market slows down to match the U.S. average. (Unlikely, but this is just a for-instance.) Even at 4.3%, investment properties offer a much higher rate of return than, say, money market accounts.
Now, since you’re a smart cookie, you probably just thought, “OK, fine—but how does real estate compare to the stock market?” That’s a great question—and the truth is, there’s no easy way to directly compare real estate returns to stock market returns. In general, though, compared to the stock market, real estatement investments:
Carry lower risk
Offer better returns
Allow for greater diversification.
#5 Diversification
When investment advisors talk about diversifying your portfolio, they’re simply advising against putting your eggs all in one basket. With a diverse portfolio that includes several different investment “channels,” you lower your risk while maximizing your returns. Real estate is a safe, stable way to diversify.
#6 Inflation Hedge
For all you non-econ majors out there, inflation is basically a rise in the cost of goods and services—which reduces the “buying power” of a dollar. In other words, $1 will buy you less today than it would 20 years ago.
Investment property is a hedge (protection) against inflation for two reasons: Inflation drives up the value of your property and drives up rent prices. So, even as your cost of living increases (as inflation rises), you can make up the difference by raising your rent.
#7 Leverage
The longer you own your investment property, the longer you make mortgage payments, the more your property appreciates, the more equity you wind up with. And, when you’re ready, you can leverage that equity to improve the return on your investment.
You could, for example, borrow against the equity to make improvements to the property—so you can charge higher rents. Or you could refinance and take cash out to purchase another property.
Drawbacks of Owning Investment Property
Owning investment property isn’t all sunshine and roses. So before you get tooooooo excited about becoming a landlord, let’s do a quick reality check.
#1 Cost
Investment properties require higher down payments, loan origination fees, and interest rates than primary residences. Down payments, at minimum, are closer to 20-25% of the purchase value. Your lender may also charge interest anywhere from 0.5-1% more than what you pay on your own home.
#2 Time
When you purchase and rent out investment property, you’re committing your time and energy to your tenants. If you don’t want to DIY, you can hire a property management company—which typically costs 5-10% of monthly rent revenues.
#3 Risk
To reap all the revenue from your investment properties, you’re relying on other people to pay their share. Commercial use properties also have more public visitors, increasing the risk of someone getting hurt on or doing damage to your property. Ensuring you have tight lease agreements and great insurance can help cushion you for the unexpected.
You don’t have to take our word for it…
We’d love to gift you a copy of David Bach’s book, The Automatic Millionaire Homeowner: A Lifetime Plan to Finish Rich in Real Estate. This immensely practical read will teach you how to use your first home to jumpstart your wealth in a totally not risky way. Just let us know who you are and where to send the book, and we’ll pop it in the mail to you!
PLEASE SEND ME THE AUTOMATIC MILLIONAIRE!
We could talk about this all day.
If you’re excited about the idea of generating wealth through real estate but you’re not sure where to start, let’s talk! We can help you think through the pros and cons of rental properties, guide you toward ideal neighborhoods, and answer all your burning questions. Book a Discovery Meeting today!
