The Four Ways Investment Properties Make You Money

Dated: December 17 2023

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Hey there, investors! Whether you're dipping your toes into the real estate market for the first time or you've been around the block a few times, it's no secret that investment properties can be the golden ticket to building and boosting your wealth. In this blog post, we're breaking down the four ways that real estate can help pad your pockets: cash flow, debt paydown, tax depreciation, and property appreciation. Buckle up, because your financial journey is about to get a whole lot more exciting!

1. Cash Flow: The Money You Can Count On

Let's start with the sweet sound of cash flow – the kingpin of real estate investments. This is what most people think about when you mention making money with investment properties.  Cash flow is the moolah that lands in your bank account after all the bills are paid. When your rental income exceeds your property expenses (think mortgage, property management, maintenance, and the like), you're riding the cash flow wave. It's like having a money tree in your backyard that keeps on giving, and who doesn't want that?  For newer investors, cash flow is likely one of the most important variables when deciding to buy a property.  Most newbies will not have the capital to hold a property with negative cash flow while waiting for these other “wealth increasers” to kick in.

2. Debt Paydown: Let Your Tenants Foot the Bill

Here's a little secret: Your tenants could be helping you pay off your mortgage. Every month, as they hand over their rent, a portion of it goes toward reducing your loan balance. It's like having your own personal debt-slaying team. Over time, the outstanding debt decreases, and your equity – the ownership you have in the property – grows. It's a win-win situation that leaves you with a property that's not only appreciating but also inching closer to being mortgage-free.  Of course, this doesn’t mean anything if you paid cash for a property.  That just means your cash flow is amazing (hopefully)!

3. Tax Depreciation: The IRS's Gift to Real Estate Investors

Say hello to everyone's favorite topic – taxes! Investment properties come with a gift from the IRS called tax depreciation. This is a non-cash expense that allows you to deduct the cost of your property over time. While your property appreciates in value, you get to offset your taxable income with these depreciation deductions. It's like getting a little tax break while your investment keeps growing – a true win for your wallet.  For residential property, you are allowed to depreciate the building only over a period of 27.5 years.  You can not depreciate your land, just the structures that sit on it.  This means that for a $100,000 house, you could take a depreciation expense of over $3,600 per year!  To get even more you could look into a cost segregation study.  That could allow to take more depreciation in the early years of ownership.  In order to take full advantage of depreciation, make sure you are working with a qualified CPA.  Everyone’s situation is a little different and they can help you make the best decisions for you.

4. Property Appreciation: Growing Wealth While You Sleep

Last but certainly not least, let's talk about the magic that is property appreciation. Over time, real estate tends to increase in value. Your property appreciates, and so does your net worth. It's like planting seeds in a garden – you water it, nurture it, and watch it bloom. The beauty of property appreciation is that it happens passively, meaning you're building wealth even when you're catching some z's.  This is called “natural appreciation” as you are just letting the property naturally increase in value.  The other type of appreciation is called “forced appreciation”.  This is when you make changes to the property, such as upgrading a bathroom, that increases the value.

So there you have it – the four amigos of real estate wealth-building: cash flow, debt pay down, tax depreciation, and property appreciation. Whether you're a real estate rookie or a seasoned pro, these strategies can turn your investment dreams into financial reality. So go ahead, explore the world of real estate, and let your money work for you while you enjoy the journey to financial freedom! As always, you can contact us with any questions.  Happy investing!

 

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Billy Daniel

After investing in real estate for several years, I decided to get my real estate license so that I could more directly help others navigate the exciting, and sometimes frustrating, world of real esta....

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