Historically, renting property has proven to be one of the safest and best investments a person can make. At CRES, we recognize the potential of this investment and have a team of experienced professionals to help find the perfect investment property and even manage it if you want to be totally “hands-free."

There is an adage that says “If you are good to real estate when you are young it will be good to you when you are old.” As a long-term investment, real estate is one of the best ways you can insure future financial security. Let’s take a look at some of the ways you can make money with rental properties and how they can help prepare you for your future.

Four Ways to Make Money in Rental Property

Monthly Cash Flow

A simple calculation can help you determine if the property you are considering will have “cash flow”. This is when the amount of your monthly revenue from rent exceeds the amount you have to pay for a mortgage, taxes, insurance, and general maintenance. In some cases, the lease rate by a tenant can include a pro-rata share of taxes, insurance, and common area maintenance which lessens the potential of unanticipated expenses which wreck a budget.

Experienced professionals at CRES can help you understand if the property you are considering will be well suited for being a rental. Whether the rental property is intended for commercial purposes or as a living unit, the concept is the same. CRES can identify the various factors which need to be considered when creating a financial analysis of an investment property. This includes guidance on the condition of the rental market and the potential income range a property may generate.

Because most mortgages are fixed, meaning they don’t change from year to year, in many cases cash flow increases over time. This is a result of rent bumps while the biggest expense, the property loan, does not change increasing your cash flow.

Debt Reduction Creates Profit

Amortization is another way of saying that making a monthly payment on a loan obligation results in a reduction of the loan. Just like your house loan, paying monthly mortgage payments results in a slow but steady reduction in the balance. This is a “silent” profit coming from an investment and realized when it is sold or refinanced.

For example, if you borrowed $200,000 at a 6% interest rate for 20 years, at the end of 10 years you would owe $129,062. That means, if the property were sold for exactly what you paid for it after 10 years, you would still make about $70,000, in addition to any other profit realized. The tenant is “making” you money every month by paying off your loan even if you aren’t actively doing anything to increase your revenue.

Tax Benefits of Investment Property

Many components of an investment property wear out or depreciate over time. HVAC units have a limited lifespan, roofs need replacing, and other aspects of a rental property which diminish in value create what is known as “depreciation” each year.

Depreciation is an item that is determined by your professional tax preparer based on a schedule created by the IRS. When the amount of “depreciation” exceeds the amount of “cash” flow or “profit” generated by the property, it allows you to deduct an amount from regular income when calculating your annual personal tax liability. Just like you would take a deduction for medical or business expenses, depreciation becomes another tax deduction.

Depreciation is not a waiver of tax liability but a “deferral”. This means at some future time when the property is sold, you have to account for the depreciation. However, during the interim, you can use and make money on the amount saved. You may even pay less tax “recapture” at a future date by converting ordinary income into a lower tax rate for long-term gain. Your accounting professional needs to provide a more complete analysis of how this will affect you.

Increased Value of your Property

Real estate prices have historically risen in value over time. Of course, many factors will impact the future value and there may even be roller coaster-type events that raise or lower prices. But if you rely on the professional guidance of real estate professionals at CRES, the likelihood of future appreciation is much better over that longer period.

To demonstrate the mathematical calculations only, and not as any form of value guarantee, let’s look at an example. If you were to buy that same $200,000 investment property and said that the value was increasing at a more normal annual inflation rate of 3%, what would that mean 10 years from now? It would be worth about $268,783. This is a $68,783 profit before expenses and any taxes.

Stunning Results!

These four options demonstrate the outstanding potential for making money with a rental property. Using our example above, the initial potential gross profit on a $200,000 property is about $139,721 ($70,938 + $68,783). Add in the value of cash flow and tax deferral and it becomes clear why many fortunes are made in real estate.

These numbers are provided just as mathematical calculations using assumptions to demonstrate conclusions. No investment is a “sure thing” and many variables will impact these results, whether lower or better. Using professionals to assist you in the many legal and accounting areas is an absolute necessity. Combine that with the experience and skills provided by CRES and your chances of long-term success go way up.

Fill out our contact form or give CRES a call today at 785-238-6622. By doing your “homework”, you’ll put together the best team to serve your personal needs. Let us help you navigate one of the most important financial statements you’ll ever take.