3.5 Ways Rental Properties Make You Money

Owning rental properties is one of the best ways to create long-term wealth. Unlike many other asset classes, where you only make money if the investment increases in value, rentals provide multiple ways to profit — all at the same time! 

Here, you’ll learn the three (and a half) ways rental properties will help you reach your financial goals. 

1. Cash Flow 

First up is cash flow. Let’s say you own a single-family home that you can rent out at $2,000 per month. If your expenses (including mortgage, taxes, insurance, etc.) are only $1,600 per month, you get to keep $400 per month in cash flow. 

This recurring monthly income can add up quickly. 

2. Principal Paydown

Let’s say your monthly mortgage payment is $600. Every time you make a mortgage payment (using rent revenue), the principal balance on your loan decreases. 

At the beginning of your loan’s term, most of your payment will go toward interest payments. As the loan progresses, payments will shift more towards principal. Take a look at an amortization calculator to visualize the relationship between principal and interest. 

So, while recurring cash flow boosts your assets, paying down principal actively chips away at your liabilities. 

3. Appreciation 

It’s no secret that home prices rise over time. While markets rise and fall, nationwide home appreciation averages around 3.8% per year. Plus, in markets like Nashville, Austin, and Boise, home values are increasing at a much higher rate. Over time, these compounding gains lead to substantial wealth. 

3.5 Tax Savings 

The United States tax code smiles favorably upon real estate investors. Owners of rental property can deduct a wide range of expenses, including repairs, capital expenditures, and property management fees. 

Plus, the IRS permits depreciation deductions. Basically, you get to deduct ~3.64% of your property’s value each year for 27.5 years. 

For example, if you buy a home for $275,000, you’d get to deduct $10,000 from your income every year for 27.5 years. 

When you combine depreciation deductions with deductions for maintenance and other expenses, your rental property will likely operate at a loss for tax purposes, allowing you to keep your monthly cash flow without paying income tax. 

Why Real Estate Is a Powerful Investment 

I love real estate because the 3.5 ways you can make money work together to reduce your risk. 

For example, if the real estate market is down and home prices are slumping, you can just collect your tax-sheltered cash flow and wait it out. No need to sell properties until home prices come back up. 

Instead of the gut-wrenching anxiety that comes along with watching the stock market crash, you can have peace of mind knowing that your monthly rental income is keeping you afloat. 

I like security, and having 3.5 ways to make money is a great safety net. 

Reach Out

I’m always happy to talk about real estate. If you have any questions (or want to form an LLC to hold rental properties), feel free to reach out.

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