Do you actually know all of the ways you profit from a property? You might have a basic feel for them, but I bet you don’t realize all of the ways you can profit from real estate. Even if you do, it never hurts to review a summary of the income streams to reignite excitement for your first (or next) real estate investment!
1. Montly Cash Flow
This one should happen, but unfortunately people oftentimes don’t know how to run numbers on an investment property (or they just don’t), so it’s common that a property doesn’t produce this primary stream of income. The monthly cash flow is the money you pocket each month after all expenses are paid. The majority of properties that exist won’t actually produce positive monthly cash flow, so you want to make sure you know how to really shop for properties and run numbers.
The keys to look at are the amount of expenses on the property (including expenses related to buying the property) and the amount of rental income. You want the income to surpass the expenses. If this happens on average, you should be good for positive monthly cash flow. Despite the perks of monthly cash flow, though, a lot of people buy properties with negative cash flow. Then where can they expect to see income? Well, hopefully they bought something in the wave of
Most people are familiar with this one, if not the most familiar with it! The general trend of housing prices increases over time. Whatever appreciation happens to the value of your property is free cash to you. In order to see the actual cash profit from appreciation, you either need to refinance the property, take out a home equity line, or sell the property, but either way, the money is yours as long as it’s there. Some markets appreciate in crazy-high waves, while other markets stay fairly neutral with minimal increase or decline in values, but in general, real estate typically does move upward in value. Some people buy investment properties solely for the appreciation potential. Be careful if you do this because banking on appreciation is essentially speculation, and as we know from 2009, speculation doesn’t always pan out in our favors. However, appreciation has also put some pretty pennies in people’s pockets.
3. Tax Benefits
Real property taxes, both state and local, can be deducted. Interest on mortgage loans on a first or second home is fully deductible. The tax benefits of owning a property is fairly obvious by itself, but what isn’t as obvious are the actual income numbers the tax benefits will put in your pocket. The thing to know with rental properties, for example, is that the IRS considers them to be “passive income,” which allows for substantially more benefits in the taxation department than “active income”.
4. Equity Build via Mortgage Payoff
If you buy a cash-flowing rental property that experiences appreciation and you are getting mad tax benefits all the while, there is still something else that is happening along the way. It’s related to appreciation in that it is equity-related, but it’s in addition to appreciation. Assuming you bought a property that the expenses are covered by the rental income, your tenants are paying down your mortgage for you. And as a mortgage gets paid down, that is just more money to your name. Let’s say you own a rental property for 30 years and experience absolutely no appreciation on it, but the rental income has been covering your mortgage all that time. Now you own a property free and clear, and all of that equity is yours to use.
Obviously, this profit center is dependent on having purchased the property with financing, so bear that in mind. Some might try to argue against tenants paying down the mortgage because that would otherwise be money in your pocket if you didn’t use a mortgage at all, especially with the interest, but that then becomes a discussion as to whether you are a bigger believer in leveraging investment properties versus paying cash for them. Personally, I prefer to leverage because the returns end up being higher in the end. There’s no wrong way to do it, but know that if you do decide to leverage, then you will get the equity pay-down/off bonus.
5. Hedging Against Inflation
This profit center doesn’t present itself in exactly the same manner as the rest — cash-in-your-pocket style — but it is a creative one. Let’s say you buy a property in 2016 with a mortgage. Over the next however many years, inflation goes bonkers. What happens when inflation kicks in? The dollar is worth less as inflation goes up. Let’s say, then, 10 years down the road, you are still paying that mortgage. The amount of the mortgage hasn’t changed since you borrowed with it in 2017 dollars, but now you are paying it back with dollars that are worth less than they were in 2017.
Having 5 profit centers is awesome! But here’s something to keep in your mind as you think about them and start pursuing owning real estate. One of the major advantages of having 5 profit centers is not only risk-mitigation but it also gives you extra room to come out profitable on your property.
There’s no doubt about it – real estate investing is the best way to increase your net worth and build long-term wealth. Are you fired-up and ready to invest ?
Credit: Ali Boone, Hipster Investments