Doyou actually know all of the ways you profit from a property? You might have abasic feel for them, but I bet you don’t realize all of the ways youcan profit from real estate. Even if you do, it never hurts to review a summaryof the income streams to reignite excitement for your first (or next) realestate investment!
1. Montly CashFlow
This one should happen, butunfortunately people oftentimes don’t know how to run numbers on an investmentproperty (or they just don’t), so it’s common that a property doesn’t producethis primary stream of income. The monthly cash flow is the money you pocket eachmonth after all expenses are paid. The majority of properties that exist won’tactually produce positive monthly cash flow, so you want to make sure you knowhow to really shop for properties and run numbers.
The keys to look at are theamount of expenses on the property (including expenses related to buying theproperty) and the amount of rental income. You want the income to surpass theexpenses. If this happens on average, you should be good for positive monthlycash flow. Despite the perks of monthly cash flow, though, a lot of people buyproperties 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 withthis one, if not the most familiar with it! The general trend of housing pricesincreases over time. Whatever appreciation happens to the value of yourproperty is free cash to you. In order to see the actual cash profit fromappreciation, you either need to refinance the property, take out a home equityline, or sell the property, but either way, the money is yours as long as it’sthere. Some markets appreciate in crazy-high waves, while other markets stayfairly neutral with minimal increase or decline in values, but in general, realestate typically does move upward in value. Some people buy investmentproperties solely for the appreciation potential. Be careful if you do thisbecause banking on appreciation is essentially speculation, and as we know from2009, speculation doesn’t always pan out in our favors. However, appreciationhas also put some pretty pennies in people’s pockets.
Real property taxes, both stateand local, can be deducted. Interest on mortgage loans on a first or secondhome is fully deductible. The tax benefits of owning a property is fairlyobvious by itself, but what isn’t as obvious are the actual income numbers thetax 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,” whichallows for substantially more benefits in the taxation department than “activeincome”.
4. EquityBuild via Mortgage Payoff
If you buy a cash-flowingrental property that experiences appreciation and you are getting mad taxbenefits all the while, there is still something else that is happening alongthe way. It’s related to appreciation in that it is equity-related, but it’s inaddition to appreciation. Assuming you bought a property that the expenses arecovered by the rental income, your tenants are paying down your mortgage foryou. 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 noappreciation on it, but the rental income has been covering your mortgage allthat time. Now you own a property free and clear, and all of that equity isyours to use.
Obviously, this profit centeris dependent on having purchased the property with financing, so bear that inmind. Some might try to argue against tenants paying down the mortgage becausethat would otherwise be money in your pocket if you didn’t use a mortgage atall, especially with the interest, but that then becomes a discussion as towhether you are a bigger believer in leveraging investment properties versuspaying cash for them. Personally, I prefer to leverage because the returns endup being higher in the end. There’s no wrong way to do it, but know that if youdo decide to leverage, then you will get the equity pay-down/off bonus.
5. HedgingAgainst Inflation
This profit center doesn’tpresent itself in exactly the same manner as the rest — cash-in-your-pocketstyle — but it is a creative one. Let’s say you buy a property in 2016 with amortgage. Over the next however many years, inflation goes bonkers. Whathappens 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 2017dollars, but now you are paying it back with dollars that are worth less thanthey were in 2017.
Having 5 profit centers isawesome! But here’s something to keep in your mind as you think about them andstart pursuing owning real estate. One of the major advantages of having 5profit centers is not only risk-mitigation but it also gives you extra room tocome out profitable on your property.
There’s no doubt about it -real estate investing is the best way to increase your net worth and buildlong-term wealth. Are you fired-up and ready to invest ?
Credit: Ali Boone, HipsterInvestments