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What Are the Advantages of Owning a Small Rental Property?

Written by Posted On Saturday, 28 May 2022 20:04
What Are the Advantages of Owning a Small Rental Property?

Meta description: Have some extra savings that you want to invest? Buy and rent out a small property today and learn the advantages of owning a small rental property! 

If the thought of buying a house or an apartment to rent out has ever crossed your mind before, you have come to the right place! Venturing into the real estate world and making substantial profits on rental properties sounds great, doesn’t it? 

 

These properties can reward you financially, and the advantages of owning a small rental property are numerous.

 

In this article, we will discuss the advantages of owning a small rental property and how you should make that decision.

Small Rental Properties

Small rental properties in the United States are usually multifamily buildings where people who reside come from a low-to-moderate income background. 

Let's take a look at the types of small rental properties that are usually available in a real estate market:

Normal Apartments

This is a living space within a residential building. It consists of 2-3 rooms ideal for an individual or a small family. Basic standard apartments have a bedroom, kitchen, bathroom, and living room, while some might also have added amenities like a parking space. There are three types of apartments within this category: 

  • A studio apartment is fit for an individual. It has one massive space that serves as a bedroom, living room, dining area, kitchen, and a small bathroom.
  • A loft is a large adaptable open space, often converted for residential use.
  • A garden apartment is similar to a townhouse and surrounded by a landscaped lot.

Serviced Apartments

These are high-end rental properties that include all the facilities of a typical apartment but have additional services provided by the landlord. Such an apartment can consist of cleaning services, a shared pool, a gym, repairs, and other benefits for the tenants. 

In short, serviced apartments are like hotel rooms.

Single-Family Home 

A single-family home is a free-standing residence, much like a usual family-owned house. Such homes usually have their own private patio, garage space, and a small garden. 

The detached house can also be a single-story or a multiple-story structure with other amenities such as a pool, boundary fences, a driveway, and a garage. 

The benefits of a single-family home are numerous, especially if your tenant is an avid DIY-er.  Projects like woodworking in an apartment might disturb the neighbors, but in a single-family home, this is no longer an issue.

Benefits of Owning Small Rental Properties

There are many advantages of owning a small rental property. These include:

  • Income from Tenants

One of the most significant advantages of owning a small rental property is your tenants' direct stream of income. The rent you receive on a monthly or weekly basis will go straight into your bank account and usually be sufficient to cover your expenses for the month or the week. 

Maintaining this source of income requires little to no effort and can be attractive for people who have retired and are now looking to make money on the side.

  • Tax Benefits

The Internal Revenue Service (IRS) in the United States gives you the option of deducting expenses associated with rental properties from your tax, such as essential improvements, property depreciation, and other necessary costs.

This is beneficial for landlords because they can deduct interest on the mortgage, maintenance costs, insurance, and physical wear and tear on the property.

  • Greater Security

Greater security is another one of the many benefits of owning a small rental property. If you are moving temporarily for work or have a family home that you don't want to sell because of the emotional value, it is always better to rent it out than let the property stay vacant. 

Vacant properties can have many maintenance issues in your absence that can later turn into more significant problems. Empty houses are also potentially at risk of vandalism and unlawful tenants. 

Renting out property in your absence will bring you peace, knowing that your house is being looked after and cared for.

What is a Good Return on Investment (ROI) on a Rental Property?

 

Before you make your property available for rent, it is essential to measure ROI to determine your property's profitability. ROI is an accounting metric that measures how much profit is made on an investment relative to the investment cost. 

 

The ROI is also called the capitalization rate as it calculates the average annual rent that a rental property generates and expresses this as a percentage of purchase costs. 

 

Comparing your property's capitalization rate and the median capitalization rate for similar properties in the area will tell you whether you have found yourself an excellent deal.

 

For your rental property to be profitable, the return you reap should be higher than what you could have earned through traditional investments, such as bonds and dividend-paying stocks, because of the risks involved. 

 

Is Rental Property Considered a Business?

 

Generally speaking, owning property that you rent out is an investment. You earn a profit but don't necessarily work on the property itself. Sometimes, landlords hire help, such as realtors or maintenance crews, to look after their properties.

 

According to the IRS, if you rent a property to a tenant and then use the income to pay bills relating to that property, it is considered an investment and not a business. 

 

However, owning a rental property counts as a business activity if you do it to earn a profit and work at it regularly. Applying this somewhat indistinct test is a very factual determination. 

 

Relevant factors to take into consideration are:

  • Type of rented property (commercial versus residential)
  • Number of properties rented
  • Landlord's or the landlord's agent's day-to-day contribution
  • Any secondary services provided under the lease
  • Terms of the lease 
  • Whether the landlord has filed all required information returns

 

With certain documents, your rental property can qualify as a business. It is imperative to know if your rental property is a business for tax purposes.

 

Wrapping it Up

 

There are many advantages of owning a small rental property. If you are considering investing your life's savings or have recently retired and need to make money on the side, investing in a property and renting it is your best bet. We understand that owning a rental property might seem like a lot of work, but the benefits you will reap will make all your efforts worthwhile. 

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Cam Russo

https://diyspotlight.com
More in this category: > How Big Data Impacts Real Estate Transactions 7 Things to Consider Before Buying a House
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