There are numerous options for investing your money. Owning a rental property in addition to your primary residence can be a way for you to build wealth. You may ask yourself, “What makes real estate a money-making machine?” Let’s talk about everyone’s favorite topic first.
CASH FLOW: Rental income is real money and it comes in the form of monthly rent. There are, of course, several things to consider when calculating money going into your pocket. It’s not quite as simple as collecting monthly rent and depositing into your account, unless you own the property free and clear.
Here’s an example: Lets say rent is $1500. The PITI is $900. If we subtract $900 from $1500 there’s a profit of $600. Pretty good right? Definitely a great start but remember a landlord should be prepared to pay for vacancies and maintenance issues. A good rule of thumb is to sock away 5% for vacancy and 5% for maintenance each month. So in this case the landlord would save $150 per month bringing the $600 profit down to $450.
PROPERTY APPRECIATION: Appreciation is another way to make money in real estate. Real estate appreciation is the increase of the investment property’s value over time. A rental property can appreciate in value while at the same time creating cash flow. Investors need to hold on to the property for approximately 10 years to see significant appreciation. At that time they have the option to sell and make a notable profit. Keep in mind that location, inventory and mortgage rates also affect appreciation.
YOU’RE THE DECISION MAKER: Most people find being the boss an exciting benefit of owning rental property. You alone get to decide which property is a good fit for you, where and how much to spend on a rental property, how much to charge each month, who will live in your property, how to handle maintenance issues and who will manage the property if not you!
TAX DEDUCTIONS: When in doubt, hire a professional who knows accounting with a focus on real estate investing. Preferably one who invests in real estate themselves. Every expense associated with rental properties are tax deductible. Keeping a detailed expense report is of the utmost importance including records of interest on your mortgage, insurance, interest on credit cards used for property purchases, property taxes, maintenance repairs and professional fees. You may also be able to deduct travel to and from the rental property, your home office and legal services. See Nolo.com for a comprehensive list: NOLO
TENANTS WILL PAY DOWN THE MORTGAGE: With every year of owning a rental property the tenants are paying down the amount you owe on the property. The longer you hold the property, the more of the loan principal your tenants are paying down and the more wealth you are creating for yourself. Take the standard 30 year loan. The entire 30 year loan will have an interest rate that stays the same. In the beginning of the loan, significantly more money is paid to interest than to principal but by year 15, it is nearly a 50/50 split.