May 25, 2022

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Reasons Why You Should Finance Your Investment Property

3 min read
investment property loan

Image Source: Pexels

You’ve decided to buy an investment property, and that’s awesome! Now the question becomes how you will finance it? For some people, investing in an investment property can be daunting when considering the cost of an investment property, especially in today’s hot market. But take the time to evaluate your situation and use the right tools properly. You can find the best Investment Property Loan that best fits your needs so you can start cashing in on your investment properties sooner rather than later!

You Won’t Be Putting All Of Your Eggs In One Basket

The apparent reason why financing your investment property makes sense is because it’s safer than putting all your eggs in one basket. If you own just one piece of property outright, and it tanks, you have a real problem. If you finance several different properties, even if one (or two) of the tanks, you still have others providing cash flow to help make up for that shortfall. This is why experienced investors tend to purchase properties with other investors: better diversification!

Gain Leverage

You gain leverage when you buy an investment property with an investment property loan. Not only can influence save you money on your interest rate because of lower loan-to-value ratios, but it also allows for greater tax deductions. Homeowners can deduct a percentage of interest payments and even depreciation from their income taxes with an investment property loan. Without a loan to finance your investment property purchase and upkeep costs, you lose out on those deductions—and that could cost more than just dollars over time.

investment property loan
Image Source: Pexels

Interest Payments Are Deductible

If you’re smart about it, any mortgage you take out on your investment property will be tax-deductible. That means that instead of paying taxes on your income—you get to pay them on a smaller number (the interest payments). As a bonus, if you itemize your deductions when filing with your taxes and your rent is less than $27,000 per year ($36,000 if married), then all of those mortgage interest payments are fully deductible as well. Remember that for most forms of financing—these rules do not apply since they don’t require a down payment.

Control Costs

You can control how much you pay in interest on your mortgage by taking out a loan to finance your investment property. Mortgage rates vary and are subject to change, so that control can be a handy tool for helping you keep within your budget. Additionally, it is easier to pay off one large loan than several smaller ones. Therefore, with an investment property loan, paying down principal is always on top of your priority list.

Protect Cash Flow From Damaging Gaps

Financing your investment property allows you to make repairs and cover other expenses when you need to, without worrying about dipping into cash reserves. In addition, financing and investment property can prevent a cash-flow gap, which is short when rent payments are more extraordinary than revenue. For example, if your tenant rents out a $1,000 per month apartment for $800 per month in January and February but doesn’t pay any rent until March 1st, that’s a cash-flow gap. Without financing, you might have to wait until March 1st to begin receiving rental income again or even risk eviction.

Increase Rental Income Cash Flow 

One of your main goals as an investor is to maximize cash flow. Owning a home is likely one of your most significant expenses each month. Financing your investment property will enable you to deduct those expenses from rental income and create a lower tax bracket while you own it. By putting down little or no money out-of-pocket, you can improve your financial security and well-being in retirement by using rental income to offset regular expenses. Less debt also means less risk if an unexpected situation arises that causes you to have more costs than usual (job loss, health care problems, etc.).