Economics of Rental Property
Rental properties provide a valuable resource for renters unwilling or unable to purchase a home. However, increasing demand from renters can lead to a spike in property prices. In addition to typical economic forces leading to increased rental rates, landlords can realize a profit from rental properties in several ways.
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Demand and Supply
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The varying availability of rental properties plays into one of the most basic economic tenants: the concept of demand and supply. If a neighborhood becomes popular, or if changing circumstances make an area highly desirable, demand for a rental property may increase and correspondingly drive up prices. Similarly, a report of crimes in the area or environmental concerns may cause both demand and prices to fall.
Price Ceilings
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Some areas impose price ceilings, or maximum prices, on rental properties. These regulations cause demand to increase but landlord profit to remain steady or even decline. As a result, landlords become less interested in maintaining the properties and some may fall into disrepair. The continued demand, driven by mandated low prices, negates traditional demand and supply forces. Prices remain the same for properties of lower quality.
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Profits
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Landlords realize profit from rental properties in several ways. Although the rent payment itself may initially seem like the only profit vehicle for a landlord, the rental property website Michigan Tenants points out other sources of income. As the landlord uses rent payments to pay off any outstanding mortgages, the landlord assumes an increasing amount of ownership in the property. After some time, the landlord can claim complete ownership of the property, adding its value to his net worth. In addition, Michigan Tenants notes that real estate tends to appreciate over time, so the landlord continues profiting from the natural rise in value.
Tax Incentives
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In addition to profiting from the property itself, many landlords use tax deductions to maximize their income. According to Michigan Tenants, landlords can deduct mortgage payments, insurance premiums and utility bills from their taxes, further increasing the distance between the amount they receive from the tenant and the amount they actually pay for property-related expenses. In addition, landlords can also deduct maintenance costs, property management and even real estate taxes from their federal tax bill. Finally, Michigan Tenants also observes that the Internal Revenue Service allows landlords to deduct calculated depreciation on a rental property even as the property rises in value.
Benefits
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Rental properties provide a valuable service in the community, according to the real estate e-zine The Bigger Pockets. Rental properties serve as a source of housing for families and individuals either unwilling or unable to buy a home, and landlords who take out mortgages to pay for rental properties boost general economic health in addition to fattening their own wallets.
Considerations
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Though rental properties provide benefits for tenants, landlords and the general economy, a poorly researched property can lead to headaches all around. Landlords must get and keep a mortgage, collect timely rent payments from tenants and keep the home and property in good repair.
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References
- Photo Credit $100 house image by Paul Heasman from Fotolia.com
