Rental properties are good investments. You can build your rental property portfolio using 1031 exchanges, which can give you strong cash flow over time. 1031ex.com explains that a taxpayer can postpone or defer the taxes gained from selling property and invest the proceeds in another under the Internal Revenue Code (IRC) Section 1031.
Earning Better Through 1031 Exchanges
If appropriately used, 1031 exchanges can help you make more money from your property. You can do so by investing the money you save from not having to pay state and federal taxes on the sale of your property, or the capital gains tax.
The income you obtain from this transaction, however, depends on the structure of your exchange as there are several. These include deferred exchange, simultaneous exchange, zero equity exchange, reverse 1031, and others. Asking for help from professionals can make the process easier and effective.
Also, the process tends to get complicated and missing a step, like setting up a section 1031 before selling the property, could mean lost opportunities from this tax strategy.
While owning property can be lucrative, you do have challenges to handle.
Challenges in Rental Properties
Although it is tempting to become a landlord due to the new tax laws that offer a significant benefit, there are still challenges that you will be facing once you enter the industry.
One of the challenges is financing the property. Since many real estate investors can’t buy an investment property in cash, they rely on a mortgage loan from the bank. They have to pay at least 20 percent down payment.
Another challenge that you may face is rental property management. As a landlord, it is necessary that you maintain your property for your tenants. Upkeep prevents broken pipelines or malfunctioning heating system, which can affect the vacancy rate of your rental property as well as raise complaints.
If your tenants are happy staying in your property, they may stay longer; high vacancy rates for a long time may result in negative cash flow.