The multiple number of ways rental properties put money in my pocket are why I love them. Most investments, such as stocks and bonds only offer one or two ways to make a profit, but rental properties offer up to four.
The 4 Profit Producers of Rental Properties
1.) Principal Paydown
Best part about having a loan on a rental property is that the rental income you bring in pays the mortgage you used to acquire the property.
Thus, someone else is building equity in the property for you. With each rental payment and subsequent mortgage payment the balance of your mortgage goes down.
The idea of making a down payment on a property and then 15, 20, 30 years later having it paid off without ever making a mortgage payment out of my own pocket still gives me goose bumps!
So even if the property’s value stays unchanged over the life of the loan you still end up with a ton of positive equity come payoff.
2.) Cash Flow
This is the obvious one that you have heard me talk about a thousand times before. There is a reason for that though! Producing positive cash flow or better yet, not losing money each month is the main key to the other profit producers.
A simple way to calculate cash flow is with the use of a property calculator. You can get free access to our calculator here –>> Property Calculator. Be sure to watch the emailed video explaining how to run the numbers.
The goal is positive cash flow, meaning after you use the collected rent to pay the mortgage, taxes, etc there is money left over to put in your pocket each month.
This is in addition to the fact that the rent payments are paying down your mortgage and building equity.
Also, you should not be coming out of pocket for maintenance and repairs either, a portion of rent should be allocated for those – like I said, be sure you are using the property calculator as it has allocations for these built in for you.
3.) Tax Benefits
Remember I mentioned cash flow being important? Well, this is a classic example.
You cannot fully enjoy the benefits of tax write-offs if you aren’t producing positive income from your rental property.
The beauty of a rental property is you get to deduct depreciation and costs associated with maintaining and managing the property.
All these items reduce your taxable profit from the property in a given year, which obviously means you pay less tax on your rental income and keep more of it in your pocket.
I can’t stress enough how a good CPA is key when owning rental properties. You can prepare your taxes on your own, but the chances are you will miss some easy deductions related to owning a rental property.
Last we have the other obvious one – appreciation. Unlike the first three profit producers this one we don’t have complete control over.
There are several things you can do to help it along though. For single family properties you can do value-add updates to the property. For multifamily you can gets rents up and vacancies down to create a higher value of the property.
However, in the end this is the one I like to call “icing on the cake” because I know if I take care of the first three properly than this one is kind of a freebie bonus as a I know appreciation is now guarantee.
So there they are – The 4 Profit Producers of Rental Properties.
What other investment is offering that many ways to make money!?!
For a complete guide on buying and managing a rental property be sure to check out ScaredyCatGuide to Investing in Rental Properties.