The primary advantage of owning sound, well-located rental houses is they usually appreciate in market value just as fast as nearby owner-occupied houses. According to the National Association of Realtors, average annual appreciation of houses is just over 5 percent annually. But, frankly, that doesn't sound very exciting.
However, most rental-house investors don't pay all cash. They use leverage to control a property but invest as little of their own cash as possible. Leverage increases return per dollar invested.
For example, suppose you buy a $100,000 rental house for cash and it appreciates a typical 5 percent in market value during the next 12 months. That's not a great investment to just earn 5 percent annually on your $100,000 cash, is it?
However, instead suppose you bought the same $100,000 rental house for $10,000 cash down payment, obtained $90,000 financing, and it appreciates 5 percent in market value during the next 12 months. Now, thanks to the magic of leverage, you earn a 50 percent return on your invested dollars (presuming the rent income pays the expenses).
Are you excited yet? You should be.
An additional rental-house advantage is the depreciation tax deduction to shelter the rental income from taxation. Depreciation is a non-cash "paper loss" tax deduction for estimated wear, tear and obsolescence.
Still another advantage is you can deduct up to $25,000 of your real estate "passive loss" deductions from your other taxable ordinary income, such as job salary, interest, and dividends if your annual adjusted gross income (AGI) is $100,000 or less. If your AGI exceeds $100,000, the deductibility of investment property tax losses gradually phases out to zero when you reach $150,000 AGI.
But unused rental-property tax losses can be saved or "suspended" for future tax use. However, if you are a qualified real estate professional, such as a real estate broker, there is no limit to the rental-property tax loss you can deduct against other ordinary income.