How Rental Property's Make Money

Secrets To Making Money With Rental Property

Millions of people have built lasting wealth through rental property ownership. Not only billionaires, but regular people like your neighbors. If you are looking to buy a home and rent it out and do it right, the potential is there to make a small fortune.  And if you can do it repeatedly, you can make an even bigger fortune.

 

Did you know that there are four ways to make money with rental property?

They are; 

  • Operating Profit

  • Appreciation

  • Principal Pay Down

  • Tax Benefits

     

Here we will go into each of them in a little detail, as real estate can be an excellent path towards wealth.

 

Operating profit is the money you make from rent. What’s great is that rent tends to go up with inflation, but the mortgage amount (often your biggest cost) stays the same. Of course, you do have to account for expenses.

These include things like taxes, insurance, repairs, capital expenditures, snow, grass cutting and a management fee if you use a management company. It is definitely prudent to take some of the rent in your budget as a vacancy allowance, because your units will sometimes be empty. It is often said that as a rule of thumb, expenses will be fifty percent of your rental revenue.

 

It is good to make “pro forma” numbers and estimate allocations for each of your expense categories. That way when something needs to be fixed or you have a bad tenant, you can rest easier as you already have it allocated in your budget. After you’ve been in business for several years, you will have a better idea what your true expenses are and can more accurately estimate costs.

 

Rental properties can be cash cows. Some people even make a living off renting their properties. On the other hand, some people like to hold properties that lose money and hope they can make money back with appreciation. Beginner landlords should definitely not do this.

 

Another way to make money is through appreciation. This is similar to the stock market. Unless you invest in a bad area, your property is likely to be worth more than what you bought it at if you hold the property for ten years or more. There are ways to access your equity without selling the property. You can use something like a home equity line of credit (HELOC) or a cash out refinance loan. But in general, the easiest way to unlock your profits is to sell a home.

 

Massive fortunes have been built when a property gentrifies and the landlord has owned the property for decades. That being said, be careful in investing in slums like Detroit, who never seem to get out of the doldrums. Areas need a catalyst, such as a big employer moving in. Don’t get caught in a “value trap”.

 

A nice steady way to make money with owning rental property is through principal pay down. Basically, when you pay your mortgage, some of your money goes to interest and some of it goes through principal. So you are paying your loan off a little bit with every monthly mortgage payment you make.

 

This is a set amount, you can actually see how much you are going to be paying off with something that is known as amortization chart. Over the years, this really adds up. You can’t control how much you make with rent or how much your property goes up or down in value, but every month you pay down a little bit of your principal.

 

Lastly, there are tax benefits to owning a rental property. There is a pretty large depreciation amount you can take every year. How much is this? First you take the building value and divide it by 27.5 years. This usually adds up to thousands of dollars per year.

 

This makes a lot of your rental profit tax free. While this is merely an example, and legally, we can’t give actual tax advice, we do recommend talking to your qualified tax professional for more information; but make no mistake, there can be huge tax benefits to owning and operating rental property.  

 

Rental properties can be great money makers. This is partially due to the fact that there are four ways you can make money on them. So when you consider buying an investment property, be sure to consider the whole picture.  

 

For more information about researching and buying a rental or investment property, contact a trusted Realtor near you!