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.) Cash Flow
I’m starting with the most 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 in particular not losing money each month is the main key to the potential of the other profit producers.
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2.) 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.
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.
The idea of making a down payment on a property and then 15, 20, 30 years later the house being paid off without me ever making a mortgage payment out of my own pocket still gives me goose bumps!
3.) Tax Benefits
Remember I mentioned cash flow being the most 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 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.
So there they are. The 4 Profit Producers of Rental Properties.
What other investment is offering that many ways to make money!?!