A lot of people ask me to help them understand the benefits of investing in real estate. I want to share some insights into long-term investing, like rental property ownership. There are 4 different types of return on real estate to calculate.
- Cash flow. This would be different from your gross rents and your monthly expenses. If your expenses like the mortgage payment, taxes, insurance, and management are less than your gross rents, you have positive cash flow.
- Annual appreciation. If you buy a property for $100,000 and next year it’s worth $102,000, we can say it appreciated by $2,000 and that’s another return.
- Increase in equity annually. If you get a loan from the bank and it’s $100,000, every time you make a mortgage payment, that loan balance is going to be reduced. That reduction represents an increase in equity or net worth that’s accrued to you. This is often the biggest one.
- Tax. This one has to do with your tax accountant so it’s important to talk to them first. They will probably depreciate the property over 27.5 years. By depreciating the property, you can get gains on income tax write-offs that you wouldn’t have before the property ownership.
One of the benefits of real estate ownership has to do with if you’re a growing family. For instance, my wife and I bought real estate so that over the course of 18 to 20 years, we might be able to help pay for our son’s college education. It’s a great incentive to consider the benefits of real estate investing. But it’s not for everyone - there can be management headaches and maintenance issues and things that can be quite speculative. It’s important to talk to an expert or a financial advisor to decide if it’s a good idea for you and your family.
Please don’t hesitate to reach out with any more questions you may have for me!