It is Never Too Early in the Year to Prepare for Tax Deductions on Your Investment PropertyIf you’re thinking about expanding (or starting) a rental property business, now (in 2021) could be a great time to purchase – especially given that current interest rates are still at historically low levels.

But what if you have an ample amount of cash available? Does it make sense to do an all-cash transaction and completely eliminate a mortgage, which in turn could leave you with far fewer outgoing expenses.

Before answering that question, knowing whether or not this alternative is right for you will depend on what it is that you’re looking for in terms of short- and long-term objectives with the investment.

The most common ways that people purchase real estate investment property include:

  • Financing through a traditional lender like a bank or lending institution
  • Borrowing from a hard money lender or private investor
  • Using “unconventional” options like a credit line with investments or other property as collateral
  • Paying cash

Going the route of borrowing money for the investment can provide you with leverage. For instance, if you purchase a $100,000 property with 20% down (or $20,000), and the value of the property goes up to $120,000 the following year, you have essentially generated a 100% return for that year. ($20,000 down, with a $20,000 “gain” in Year 1 equates to a 100% return on your investment). On top of that, the mortgage interest that you pay on the loan is tax-deductible.

On the other hand, if you paid for the property with $100,000 in cash, the new value of $120,000 would only represent a 20% gain. Even so, though, paying for a property with all cash can still have its advantages.

In this case, you are not in debt to anyone, and you therefore own the investment free and clear. With no financing to deal with, your closing costs could also be much lower than if you were committing to a mortgage. In addition, without the monthly mortgage payment due, you will net much more each month when the rent comes in from your tenant(s).

In any case, the “cost” of your time spent managing tenants and maintaining the property must also be factored into your rental property investment activities. If this is something that you would rather delegate, an experienced property management team could be a viable solution.

If you own (or you soon plan to purchase) residential real estate in Orlando and/or the Central Florida area, give us a call or send us an email with any questions that you may have, and we’ll be happy to provide you with more details.