Rental homes can offer great profit potential

It's tough to lose money when real estate values are appreciating and the tax structure in working for you.

Real Estate Notebook  by ROBERT BRUSS

A few days ago, I received a phone call from a Business Week magazine reporter who wanted to learn about rental houses and whether they are better investments than the stock market.

Without hesitation, I replied "Yes."

"Why?" she asked.

"Because rental houses offer far greater long-term appreciation in market value potential than most stocks," I replied. She couldn't believe it.

Then I explained why experienced rental house investors buy properties that are likely to go up in market value. I politely emphasized the stock market appreciates on average, about I I percent each year. However, thanks to the "magic of leverage," smart rental house investors won't purchase unless they can see at least a 20 to 30 percent annual return on their invested dollars.

In addition, I said, "Don't forget the depreciation tax deductions to shelter the rental income from taxation. "Then I explained why depreciation is the best tax deduction of all because it is a non-cash deduction for estimated wear, tear and obsolescence on the rental property. I believe I lost her on that benefit.

For most of us, our best investment has been our principal residence. Then why not own several? Because you can't live in all your houses, it pays to rent some to tenants. That way you'll benefit from the probable market value appreciation of both your primary home and rental houses. Meanwhile, your tenants "buy" your rental houses for you. Aren't they nice?

For example, in 1983 1 bought an empty, boarded-up "drug house" from the savings and loan that took it back when nobody bid at its foreclosure sale. I paid $95,000 with a $9,500 down payment. Fix-up costs (all hired) were less than $5,000. Last year I sold that house for $250,000 net cash. In addition to my $150,000 net profit, I sheltered all my rental income, plus some of my ordinary income, through depreciation tax savings.

Whatever my annual return on my $14,500 initial total investment from that rental house, it's good enough. Where else could I have earned such an excellent return?

Finally, I emphasized unprofitable improvements to avoid. These are defined as necessary repairs or improvements that don't add as much market value as they cost. Examples include a bad foundation, a new roof (although sometimes it is absolutely necessary), an additional bedroom, a family room or swimming pool. She instantly related to that one because she wouldn't want to own a house with a swimming pool.

I believe I lost the reporter when I launched into the next rental house advantage: tax-free refinancing. Every few years, I pointed out, many rental house investors like me refinance their mortgages to take out tax-free cash from the home's rising equity.


Christine Sundquist is a specialist in the sale of New primary, second, holiday-vacation rental homes located just minutes from all of the Major Orlando Theme Parks.

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