You are used to clients investing in the stock market. They often work with a financial advisor. Your role usually involves tax return preparation or details like warning them about the “wash sale” rules.
In that example, your client is working with two professionals – you and his financial advisor. But sometimes clients strike out on their own. One day your client announces he is thinking of diversifying his investments by purchasing rental real estate.
Pros and Cons of Buying Rental Property
Is real estate a legitimate investment? Absolutely. Thirty-three people on the Forbes 400 list of richest people made their fortunes in real estate. Your client has decided to follow in their footsteps and buy a piece of rental property.
As his accountant, you can advise your client in areas such as tax deductibility of mortgage interest expenses and depreciation. But there’s more to know.
Here are some pros of buying rental property:
1. Income. With interest rates at historic lows, real estate looks attractive. According to Curbed New York, gross rental yields on a million dollars invested in one- and two-bedroom co-ops in Brownsville, New York, yielded $124,378 a year. Toward the other extreme, the Upper West Side of New York returned $35,503. These are December 2015 figures. This implies a 3.5 percent to 12.4 percent gross return.