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5 Ways Rental Property Investing Makes You Money

One of the main reasons why many promote real estate as the best way to invest your capital is because of the number of avenues investors have for making money. With other investment options, the money-making opportunity in the asset is usually limited to value appreciation.

This is true for Forex trading, commodities trading, Cryptocurrencies, and, to some extent, investing in stocks. But an investment in properties offers several ways for investors to make money. Today, Upkeep Media Inc. explains the various ways rental property investing can make you money.

1. Appreciation

A person looking at market prices on smartphoneUnlike other types of tangible assets, such as cars, machinery or furniture, property appreciates over time. The structures and systems of a home may suffer natural wear and tear and depreciate as a result. But the value of the house, as a whole, tends to go up. There are three reasons why this happens.

First, inflation plays a role; as the prices of goods and services go up, they drive up the prices of homes. The second reason is demand; as with every other product or service, property prices respond to supply and demand. Third, home prices appreciate because land is a finite resource.

There are two ways that homes appreciate:

Market Appreciation

Market Appreciation is appreciation in a home’s value-driven by market forces. These market forces are primarily measured through the prices of similar properties in a neighborhood. The value of one property in a community is influenced by how much another property in the same area was recently sold.

Although market forces can force a home’s price to go up and down in the short-term, property prices, generally tend to go up.  This means that there may be periodic highs and lows in the value of real estate, but over a more extended period, homes become more valuable.

Forced Appreciation

Forced appreciation is when a property owner uses their means to cause the value of a home to increase. Rather than wait for time and market forces to drive up the price of a property, the owner does it by themselves.

This is possible when the investor implements upgrades to a home that make it more attractive than similar properties. Two identical homes that were built in the same year may be situated side-by-side, and yet one will be more highly valued than the other. This is usually because the owner of the more valuable property has forcefully boosted its value.

2. Cash Flow

Hand holding stack of cash moneyRental property investing can make money for their owner, but it also costs the owner money. The property owner must maintain the structures and systems of the home, pay the mortgage on it, and cover other expenses associated with keeping the house in good condition. The money for these costs is usually drawn from the rental income generated by the property.

If, after deducting these maintenance costs, the owner has money left over, the property is “cash flow positive.” Otherwise, it is “cash flow negative.” When a home is “cash flow positive,” it not only pays for itself but also puts money in the owner’s pocket every month.

3. Tax Benefits

As explained earlier, the structures and systems in a home are subject to depreciation due to natural wear and tear. Ordinarily, this should be a bad thing, but depreciation is another way for property investors to make money off their investments. This is because the IRS allows investment property owners to write-off depreciation as a loss.

What this means is that while a property is appreciating and earning rental income for the landlord, the owner can legitimately claim losses on the business. This is in addition to write-offs that the IRS permits landlords to make on general expenses for a property. The sum of these write-offs is that investors effectively earn a tax-free income.

4. Principal Pay Down

The word "equity" spelled out in scrabble tilesBuying a property with a home loan always creates two things. It creates a debt that is owed to the bank, and it establishes equity for the homeowner. Equity is the portion of the property that belongs to the homeowner. The owner’s equity in the property increases as they pay off the mortgage. But when the home is an investment property, the tenants in the home pay off the mortgage.

This is because the landlord uses the rental income generated by the property to settle all their obligations to the lender. In other words, the tenants help the property owner to pay for the home by paying rent.

5. Equity Capture

Person balancing budget with paper and calculatorEquity capture is another way real estate investors make money. In this case, the investor buys a home for less than it is worth, fixes it up, and sells it for more than its purchase price and renovation cost combined. For instance, the investor finds a decrepit property in a $120,000 neighborhood and buys it for $70,000.

They spend a further $25,000 to fix up the property, bringing their total cost to $95,000. And then they turn around to sell the home for $118,000, making $23,000 in the process. There are not many investments where an investor can do this.

There are other ways rental property investing can make you money. But these five are enough to convince you to become a property investor today. If you are already thinking of property investment, but overwhelmed by the idea of managing tenants, contact our team today to learn how we take the daily hassles of property management off your plate.

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