By Ella Kennedy
If you are a college student—like me—chances are you’re paying an arm and a leg for an apartment that gives very little in return. Several years ago, college student Dallas B. Tanner solved this expensive housing dilemma for himself by becoming a landlord. By financing a condo and renting out its rooms to friends and peers, he started enjoying a rent-free life. He then used the money he made from the first property to buy a second and then a third. He became enamored with rental properties when he realized the extent to which people will pay for his assets. He has since turned his investment hobby into Invitation Homes, a large-scale company that buys and rents houses. The climax of Tanner’s story is that his ten-year-old company has recently gone public on the New York Stock Exchange, now worth billions of dollars.1 With success like that, aren’t you glad they’ve left some of the houses in America for us, so that we, too, can reap the benefits of rental property ownership?
So many investment opportunities are available to you. Crypto currencies and stocks drive conversation in the media and day-to-day chatter. On the flip side, the housing market is shrouded in gloom as the affordable housing crisis is happening all over the country. In light of this crisis, I believe that owning rental properties is not only one of the best investments you can make for yourself, but also one of the best investments you can make for the lower-class members of your community. The following two sections explain the individual advantages of rental property ownership and how this investment can benefit communities.
What’s In It for Me?
Would you like to retire young? As financial advice has become increasingly more accessible, more and more college students are coveting the four-hour work week. Best known as the author of Rich Dad Poor Dad—the #1 personal finance book of all time—Robert Kiyosaki has made the idea of passive income so popular by teaching the world that the wealthy buy assets.2 The idea he teaches is to put money to work with hopes that it will multiply. The way most people begin is by finding the right property by searching for something that will break even on the mortgage during the first two years of owning it, so one can derive a profit from the following years. Owning rental properties is a low-risk, high-benefit way to enter the world of passive income. These benefits are comparable to those seen from investing in the stock market.
I. Consistent Cash Flow
Owning a rental property is a unique investment in that it produces consistent cash flow, meaning the investor gains a set dollar amount every month. In contrast, investing in stocks means riding the highs and lows of the market, never able to expect a specific return. According to ipropertymangement.com, the average one-year rate of investment on real estate in the state of Utah, as of May 2022, is 27%.3
II. Tax Reductions
Another benefit to being a property owner is receiving tax reductions. If you were to invest all your money into stocks, you would have to pay a full income tax on the dividends you earn. Real estate is different, requiring you to pay less in taxes. If you receive rental payments, you could qualify for mortgage interest, property tax, operating expenses, depreciation, and repairs, according to the IRS.4 Upon buying your first property, setting up an LLC will allow you to take full advantage of tax benefits as a property owner.
III. Inflation Hedge
The value of homes is rising. You’ve probably even heard your parents mention how much their homes have gone up in value. These days, all homeowners seem elated that they bought their homes when they did. The inflation aspect of real estate investments is one of its main benefits. Simply put, the inflation hedge is expecting an asset to increase in value over a period of time. Your home value can go down, but if you wait for the right year to sell your home, you could earn a huge profit. Figure 1 shows the median price of homes in Utah from 2017 to 2021. According to the median, if you bought a home in Utah in 2017 and sold it in 2021, you could make a profit of almost $100,000.5 Commonly, a homeowner will wait more than five years before selling a home to gain an even greater profit.
Figure 1: Median Utah Housing Market Prices
IV. High Demand
Another fantastic benefit of real estate investing in 2022 is a higher demand for rental properties. This hasn’t always been the case, and there are exceptions depending on the market, but typically if a tenant leaves, another tenant will fill their spot quite quickly.
Investment Impact
I. Direct Impact on the Lower Class
Homelessness in America is increasing due to the affordable housing crisis. According to nlihc.org, 70% of all low-income families spend more than half of their income on rent.6 If that much of their income is being spent on housing, it is logical to assume that they do not have enough income to afford food, healthcare, clothing, among many other basic necessities. The rising cost of homes is forcing the low-income families in our communities into homelessness. If we are to invest our money into something, why not invest it into a home that these families can afford to rent? Figure 2 shows the severe shortage of affordable homes for extremely low-income families.
Figure 2: Shortage of affordable homes for low-income households.
Most investments do not have such a direct impact on the lower class. The New York Times recently released an article on the subject. It says that “in 2019, the top 1 percent of Americans in wealth controlled about 38 percent of the value of financial accounts holding stocks. Widen the focus to include the top 10 percent, and you’ve found 84 percent of all of Wall Street portfolios’ value.”7 This data shows that many investments, specifically stock investments, expand the wealth gap. Although there isn’t anything wrong with investing in the stock market, providing affordable real estate properties for low-income families will help solve a serious social problem in ways that the stock exchange will not while still allowing investors to earn a passive income.
II. Why Rentals Are Increasing in Demand
The pandemic, its effects, and shifting politics are only part of the reason why housing has become so unaffordable. One major reason for homes being unaffordable is that 30% of Americans have lost their jobs to artificial intelligence and no longer have incomes. With future technological advances, another 20% of America’s jobs will be replaced by 2025.8 If you own rental properties, it means that the demand for your asset will increase, and you’ll be able to make even more off your investment. If you don’t have renters paying off your mortgage, you could be the one looking for a landlord.
Conclusion
Owning rental properties can be a way for you to have the life you always wanted. Once you’ve built up a strong real estate portfolio, you can retire early knowing your income won’t run dry. In fact, your money will continue multiplying even after you have died. By owning a rental property, you can provide a home to one of the low-income families who would otherwise struggle to find affordable housing. Since the value of homes continues to rise, don’t procrastinate buying your first rental property. You can begin now by searching through Zillow, doing research on the markets, and asking experienced investors about their experience. Every day you wait is a day you could be making money.
Notes
- Lauren Hirsch, “Invitation Homes raises $1.54 billion in IPO: source,” Reuters, January 17, 2017, https://www.reuters.com/article/us-invitation-homes-ipo/invitation-homes-raises-1-54-billion-in-ipo-source-idUSKBN15F2WD; “Invitation Homes.” Invitation Homes. https://www.invitationhomes.com/blog/who-we-are-invitation-homeshistory-and-business.
- Kiyosaki, Robert T., “About Robert Kiyosaki,” Rich Dad, 2022. https://www.richdad.com/about/robert-t-kiyosaki
- “Average ROI of Real Estate.” IPropertyManagement. 2022. https://ipropertymanagement.com/research/real-estate-roi#:~:text=The%20year%2Dto%2Ddate%20(,in%202020%20was%20%2D5.29%25.
- “Publication 530 (2021), Tax Information for Homeowners.” IRS. January 25, 2022. https://www.irs.gov/publications/p530.
- “Utah Housing Market.” Redfin. July 1, 2022. https://www.redfin.com/state/Utah/housing-market.
- The Gap: A Shortage of Affordable Rental Homes. National Low Income Housing Coalition. https://reports.nlihc.org/gap.
- Gebeloff, Robert. “Who Owns Stocks? Explaining the Rise in Inequality during the Pandemic.” The New York Times. 2021. https://www.nytimes.com/2021/01/26/upshot/stocks-pandemic-inequality.html.
- Drum, K. “You Will Lose Your Job to a Robot—and sooner Than You Think.” Mother Jones. (2017). https://www.motherjones.com/politics/2017/10/you-will-lose-your-job-to-a-robot-and-sooner-than-you-think/.
Photo: Smith, Mary. “The 6 Dos and Don’ts for Rental Real Estate Investment.” Become a Local Leader. (2021). https://www.becomealocalleader.com/real-estate-guides/the-6-dos-and-donts-for-rental-real-estate-investment/.
Visuals: https://www.canva.com/
Icons: https://www.flaticon.com.