If you want to know how to make money with rental property, there are 4 main ways to do it.
Here they are.
- cash flow
- appreciation
- mortgage pay-down / loan amortization
- tax benefits
Before I explain what each piece is, please know that I’m not in any way trying to give you financial or tax advice. You need to speak to your real estate tax professional.
Your situation is going to be different than the dude sitting beside you…so take this information as a general idea.
We cool?
OK, here goes.
How to Make Money With Rental Property Explained
Cash Flow is the grand-daddy of making money in real estate. It’s the money you have left over after paying the bills.
Sweet.
The goal here of course, is to have a positive amount left after paying all your property’s bills and expenses.
PLUS, the way sophisticated investors taught me how to do it, ALSO after putting a contingency fund aside for emergencies.
How much that contingency fund is, is up to you. I typically put 8% (of rent) away each month for each property.
Appreciation is when your property is more valuable compared to when you purchased it at the time you want to sell or refinance.
This is also a big one many investors “bank” on. But be careful. If you’re just HOPING a property goes up in value without considering the cash flow component, you could get caught holding the property in a market that takes a down turn.
On the upside, your rental property can appreciate a few ways.
Obviously, when the market makes a positive change, and it’s a hot buyers market…you’ll probably make money.
Perhaps you’ve made significant upgrades or there’s been some major land development around your property and it becomes more desirable to live in the area.
On a side note…the “ONLY” research I do to choose where to buy a property, is this:
Where the jobs are going. Where development is happening.
Done.
I don’t mess around with anything else – because I’d rather spend my time living life than inside excel spreadsheets carving out statistics and data.
You don’t have to follow my advice – but the way I see it, where there are jobs, there are people. And when you have people, you have tenants. Period.
Onward.
Two often over-looked ways when we want to know how to make money with rental property are…
Mortgage Paydown is the growth in equity after paying down your mortgage over time.
Duh. I know right?
But here’s the deal.
Because it’s not a “cash-in-your-pocket” thing, many investors discount this when they’re looking at how to make money with rental property.
This is NOT something to kick to the curb.
Think about it.
Someone else (the bank) is giving you money (about 75%) to BUY an asset that is going to give you cash flow every month. (we hope right?)
Here’s the cool part.
We both know the cash flow coming in from the property will pay for the mortgage expense!! (At least this is how the pros do it)
In other words, your tenants are paying your entire mortgage.
The interest goes to the bank for loaning you the money – it’s the “cost” of business. Be OK with that.
And the principal portion adds up and goes to you – when you sell it!
Yippee! So over time, by making those installment payments to the bank, your tenants are slowly clearing up the debt and building equity FOR you.
Lastly but not least, there’s the tax benefits from owning rental property.
Tax benefits are the property’s ability to shield income from taxation.
Again, to ensure you know that I’m in no way qualified to give you financial or investment advice, but from what I understand, this is when you can deduct real estate property expenses against your income to reduce taxes owed (possibly get money back)
This is the last way you make money with real estate and it’s one we often forget because it’s “paper” income.
Depending on how you are set up with your taxes, some of the rental income can be sheltered from taxes. (PLEASE consult your professional Real Estate Tax Accountant on this – it’s the best money you can invest)
Here’s How it works (from my understanding)
- You take in taxable rental income
- You pay for tax-deductible expenses – such as insurance and repairs
- What’s left over is your NET operating income (NOI)
- This is the portion that’s taxable
Here are some things you deduct (have I told you I’m not qualified to give you this advice??? – good 🙂
mortgage interest – remember, this is a “cost” of business, like I mentioned above, for acquiring the property
depreciation – when you can take a tax deduction over time because the property (the building) is wearing out over time.
So there you go.
You now know how to make money with rental property 4 different (and legal) ways!