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Rental Property Benefits: A Dummies’ Guide

by Ali Boone on January 13, 2014 · 22 comments

  
money

There are a million articles floating around on the internet and probably even in some books that talk about the benefits of owning rental properties. You’ve probably read them and even heard everything I’m about to tell you already, but sometimes it’s good to bring it up a notch, leave out major details, and really hammer in the big picture.

You’ve inevitably heard that owning rental properties is a very strong investment method with tons of benefits. Could you explain those benefits to a kindergartner? If you can’t, it means you don’t quite understand them fully yourself so how about I explain them for you. Very simple, straight to the point, no nonsense or confusion.

Rental Property Benefits

  1. Cash Flow. Every month your tenant pays rent. That rent should cover all of your expenses on the property with some leftover. That leftover money is free money in your pocket. Score.
  2. Equity. This one is a kicker. You buy a rental property and after however many years let’s say your mortgage has been paid down $40,000. The cool thing is you didn’t have to pay a penny to pay down that mortgage, your tenants essentially paid that down for you. So now you have an additional $40,000 equity to which you can now take a cash-out refinance on the property or use that as a home equity line of credit, or whatever other way you can pull that $40,000 out. That is $40,000 of free money you just earned! Oh, and it’s tax-free too.
  3. Appreciation. Or, your property appreciates a good bit and you decide to sell. If you’re smart you sell it for more than you paid for it, so any profit there (a lot due to inflation) is free money in your pocket. You can also get that money tax-free if you 1031 exchange it. You also profit from whatever principal your tenant paid down for you too, so maybe it’s that $40,000 plus whatever the house appreciated for. Holy mother.
  4. Tax Benefits. Have you ever stopped and thought about how much more money you would have in your pocket if you didn’t have to pay anything out in taxes? Seriously, think about it. So how cool would tax-free income be then? Well guess what, income from your rental properties is basically tax-free. You get to write-off depreciation on your properties which just about cancels out any taxes you would owe on the income. And whatever amount isn’t covered by depreciation is probably covered by the gajillion other write-offs you can take when you own a rental property.

You’re making so much free money people!

Cash flow every month is free money, the equity you build in the house is free money to you, anything you make with appreciation is free money, and you get to save what you would normally have paid in taxes… for free! Yes, all investing methods should give you free money (if it doesn’t it’s a bad investment), but rental properties stand out a lot from the rest because of how many ways the free money can hit your pocket.

While rental properties may not put as large of an amount of cash in your pocket in a short amount of time like some other methods, those other methods also force you to take a huge tax hit (so you have to forfeit a good bit of your free money) and the income stops if you stop working.

Now do you see why rental properties are awesome? On the surface it seems like they only bring in a small amount of cash flow every month, but there is sooo much as far as your returns going on behind the scenes. At the end of it, you gain serious financial gain. All the while, rental properties are really nice because you have so much control over the operation of them. If something starts going sour with them, you have quite a few options on how to remedy the situation.

If you are more of a flipper or want to focus on wholesaling or whatever you want to do, that is all great but make sure that you are investing whatever profits you make from those into smart passive investments, such as rental properties. Flipping and wholesaling will never make you financially free (unless you are able to put an entire team together who does all the work for you, but even then you essentially just started a business), but rental properties, whether small residential or large commercial, will.

In case you didn’t grasp the overall benefit, it’s free money. I love free money. Do you?

Photo Credit: Www.CourtneyCarmody.com/ via Compfight cc

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{ 22 comments… read them below or add one }

Sharon Tzib January 13, 2014 at 9:07 am

Yeah, real estate rocks! Great synopsis of why, Ali.

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Ali Boone January 13, 2014 at 1:10 pm

Yayy Sharon it does rock! :)

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Jonna Weber January 13, 2014 at 12:06 pm

I like the way you keep it simple! Even if one doesn’t consider real estate “fun” like so many of us on BP do, it makes so much financial sense to have at least a buy and hold or two in an investment portfolio.

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Ali Boone January 13, 2014 at 1:10 pm

I totally agree Jonna!

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Emma January 13, 2014 at 8:31 pm

Ali,

This is JUST how I explain it to my kindergartener (and my 2nd grader).
Great article!

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Ali Boone January 13, 2014 at 8:31 pm

Haha. Thanks Emma! Way to teach them early ;)

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Lisa Phillips January 13, 2014 at 9:47 pm

This! Thank you Ali! It is a slower sale, but that first year with the “gajillion” right offs put your money back in your paycheck. THAT is comfortable worth more than the houses I purchase, which sold me. Thats when I made it my goal to purchase at least one a year. Thanks for the lovely article!

Lisa

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Ali Boone January 14, 2014 at 11:02 am

You’re welcome Lisa! Where all are you buying? That’s great you are getting one a year!

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Martin Cortez January 14, 2014 at 2:09 pm

It took me a while to see the light of rentals.

However, after being forced to refinance and then rent several properties that I was stuck with due to the secondary note market drying up, I am now very happy with my “mailbox” money.

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Ali Boone January 14, 2014 at 2:11 pm

I love “mailbox” money Martin! :) And I may steal your phrase for future use because it’s awesome.

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Sharon Tzib January 14, 2014 at 2:25 pm

I don’t think Martin will try to take credit for that phrase, Ali. It’s been around forever. I think the first time I came across it was in “Rich Dad, Poor Dad.” It is a great saying tho :)

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Ali Boone January 14, 2014 at 2:30 pm

Oh hmm. Guess I should re-read Rich Dad Poor Dad then if I’m forgetting common phrases already! :)

Sharon Vornholt January 16, 2014 at 7:47 am

Great post Ali.

You have a way of breaking these topics down so “even a 6 year old” can understand them. That’s a great talent. I love the term “mailbox money”. Wishing you much success this year!

Sharon

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Ali Boone January 16, 2014 at 11:53 am

You as well Sharon! Thanks :)

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Kathy Peltz January 16, 2014 at 4:12 pm

Great article, I always emphasize the equity part to my clients. We have a lot of coach house properties here in Surrey BC that allow for a rental suite above the garage. This can be a real boost having two incomes coming from one property.

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Ali Boone January 17, 2014 at 6:21 pm

For sure Kathy! I love extra parts that can be rented out for more income.

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Raj January 17, 2014 at 4:29 pm

Great post Ali basic things but very powerful. These are the basics that keep me going and keep an eye on future benefits of owning properties

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Ali Boone January 17, 2014 at 6:21 pm

Woot Raj!

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Darren January 18, 2014 at 7:10 am

Actually,
the term “mailbox money” was coined by the late Lonnie Scruggs, in reference to mobile home investing. Good job Ali, simply put.

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Sharon Tzib January 18, 2014 at 9:35 am

Interesting, Darren. I hope he patented it, since lots and lots of people since him have used it :)

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Ali January 20, 2014 at 10:21 pm

Haha Sharon.

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Ali January 20, 2014 at 10:21 pm

Thanks Darren!

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