Posted by We answer lots of questions about why it’s good to invest in real estate. We thought you might want to know our top four reasons for owning investment property!
This is part 3 of a 4 part series of blog posts:
1) Cash Flow
2) Appreciation
3) Paying Down Your Loan
4) Tax Benefits
Paying Down Your Loan
When you purchase a rental property with a mortgage, you make a monthly payment to the lender. That payment includes two parts: principal and interest. Interest is the profit for the lender, but the principal is money you are paying down the loan with.
For example, if you purchased a house five years ago for $100,000 and got an $80,000 mortgage. We’ll say it was a 30-year mortgage with a 5 percent fixed rate.
Today, you would owe only $74,000 because $6,000 of your monthly mortgage payments went towards the principal of the loan amount. Ten years from now, you would owe only $65,000. This means that every year your equity increases, you would gain value in the property as long as the market value didn’t go down. Equity is the difference between what a property is worth and what you owe on the mortgage.
If you are in a financial position where you can buy the property outright, you have 100% equity. But you’ve also tied up a sizeable amount of your liquid assets (cash) in that property.
The decision to take out a mortgage or purchase a property outright is influenced by many factors including interest rates, tax law and more. We recommend that you talk with your accountant about the best way to financially acquire a property.
Next week, we’ll talk about the fourth benefit of owning investment property, Tax Benefits!
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