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BlogArrowReal Estate Investing BasicsArrowThinking Beyond Cash Flow: 3 Underappreciated Real Estate Wealth-Builders
Real Estate Investing Basics Jan 01, 2021

Thinking Beyond Cash Flow: 3 Underappreciated Real Estate Wealth-Builders

Matt DeBoth
Expertise:
8 Articles Written
keys on top of dollar bills

No one buys rental properties or invests in real estate to lose money. Losing money should never be a goal for any investor in any asset class. Although we are in a very different economy than we were the past few years, the strategy is still the same: Preserve capital and grow your investment.

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Most people will look at what the cash flow is on their rental property and think that’s all there is to it: cash flow. But this just isn’t true. There are (at least) three additional ways that real estate pays off.

3 Overlooked Real Estate Wealth-Builders

Property Appreciation

Appreciation is usually a great long-term play, but in this market, it is proven possible to be a short-term play also. Appreciation is the value of your property whether through upgrades, market cycle, or location. Depending on your market, real estate can go up in value from as little as 1% per year to 10%-plus per year, just by holding on to it.

Of course, the economy has a lot to do with appreciation, as does the individual market. Strategically selecting the property’s location is big way to play the appreciation game. Say you bought a house in an area of town that is on schedule for some community development, such as a shopping center or other attraction. This can amount to a huge payout for you, as more than likely people will want to live closer to such amenities.

Related: Forced Appreciation in Buy & Holds: How to Create Your Own Great Deals

And there are several other factors in the appreciation equation, as well. Forcing appreciation is usually done by flipping or adding value to the property. Updating your kitchen, bathroom, etc. can dramatically increase a home's value.

On larger multifamily properties this can be accomplished by increasing rents, changing the tenant base, and improving property management. Anything that you can do to increase the net operating income, or NOI, of the property is forcing appreciation. This is because usually commercial multifamily properties are priced based on a cap rate derived from net operating income. The higher the net income, generally the higher the property value.

For single-family homes, this is typically done by using comparable properties in that neighborhood. Increasing the square footage, updating the finishes and fixtures, and improving the curb appeal can boost appreciation. House flipping, in particular, is based solely on forced appreciation.

Real Estate Tax Benefits

Owning real estate has huge tax incentives. The depreciation schedule alone can have a massive impact on your end-of-year tax returns. As of this writing, you can depreciate the price of your rental property over 27.5 years. That comes out to a 3.636% depreciation rate per year.

There are also 1031 exchanges that you can use to defer your capital gains and purchase bigger properties.

Related: The 10-Step Process to Perform a 1031 Exchange

And let's not forget about the little-known secret of cost segregation. Cost segregation is a tax strategy that allows real estate investors to use accelerated depreciation to increase cash flow. This is done by breaking down and reclassifying certain interior and exterior components of a building. These components are depreciated over 39 or 27.5 years for commercial and residential properties, respectively.

Having a great accountant on your team is paramount. Be sure to choose an accountant that is familiar with the tax advantages of owning real estate. There are many tax advantages and tax writeoffs that people are surprised to know about. Buying supplies—from printer paper to a cell phone—can all be used as tax writeoffs. From upgrading the flooring in an apartment to putting on a new roof, all of this has tax advantages.

Principal Paydown of Loan

If you have a loan on your rental property, this is a huge piece of your wealth. Your tenants are not only paying to live in your property every month, they are also making your loan payment for you. If your loan is on a principal and interest schedule, then a portion of your monthly payment is going toward the principal. (This just means the bank is taking a little for themselves and putting a little towards your principal.)

If your loan is interest-only, or I/O, this just means the bank is taking all of the payment (and usually for a short period of time—typically between six months to three years, depending on the property and lender). The payments are smaller than principal and interest payments, but none of it is going toward your balance.

You may utilize these types of loans when buying a property that needs work, such as rehabbing or increasing the quality of tenants. Having a large vacancy at closing or because you plan on removing a majority of the tenants can be another reason for wanting to use an interest-only loan.

Principal paydown is probably the second most important part of a real estate deal behind cash flow. Your debt today is your income tomorrow. If you have a mortgage payment of $1,200 per month for the next 20 years and your average monthly cashflow is $300, your net income once that property is paid off is going to be $1,500 per month! This is why I don’t always just pay attention to cash flow.

Owning a large apartment building with a $13,000 per month mortgage can literally be your retirement in 20 years. Just imagine owning two or three large properties and a handful of single-family rentals. Paying off these mortgages will catapult you into wealth you've only dreamed about.

The Bottom Line

Real estate is one of the best investments a person can make in their lifetime. The historical returns and wealth-building powers of owning property are what can set you apart from the average person.

Cash flow is by far the most important part of running your numbers. It determines the value of the property and whether or not it can be leveraged against. But educate yourself on the other advantages of real estate, and you will set yourself up to make the most of this investment type.

Questions? Comments?

Join the discussion below.

By Matt DeBoth
Matt DeBoth has been an active real estate investor since 2011. Matt served in the United States Marine Corps for eight years as a Force Recon Marine and has done multiple deployments to Iraq, Afghanistan, and the Middle East. Matt bought his first investment property while on a combat deployment to Afghanistan. Since getting out of the Marine Corps, Matt has flipped over 25 rental properties and currently owns over 140 units. He specializes in landlording, creative financing, and using the BRRRR method for mid- to large-sized apartment complexes.
Read more
6 Replies
    Kristopher Kelly Investor from Milford, Delaware
    Replied 23 days ago
    Hello Mrs. DeBoth, My name is Kristopher Kelly. I am a loadmaster on the C-5 Aircraft and go to many of the places you have been. Thank you for what you have done and everything you still do now. I had a quick question if you could answer it for me. With what I have read in your bio and what you wrote in this article, what would be the most important piece of advice for a young active-duty guy wanting to better his future and retirement through real estate? And what is the best way to go about investing while being away most of the time? I read books, listen to podcasts, and attend webinars on real estate all the time. I am actively saving money waiting for my criteria of a deal to pop up. Thank you for any advice you can offer and thank you again for writing this article and giving back with information sir! -Kristopher Kelly

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    Joshua King
    Replied 23 days ago
    Hello Matt, great article. I'm a active duty, 22 years, E9. Thank you for your service. I currently own 3 homes. When I retire I'm looking to get an apartment building. Your story is inspiring. Thanks.

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    Martin Carstens Investor from Edmonds, Washington
    Replied 23 days ago
    Matt, Kristopher and Joshua Thank you for your service! You have gone where few are willing to go! I am not a veteran. How ever as a merchant marine, I do know something about time away from the home front for months at a time. And in this case real estate. In short. If I can do it, any one can. Kristopher, if I could? I would point out, you have goal, and are educating your self, fantastic! Identify, what kind of first property you want & need? A single family home, and you rent out rooms in addition to living there. Or a duplex, with one unit for yourself. In either case, you break into real estate. Start your hands on learning, building equity and net working with professionals and other like minded folks. From what I know you have some great opportunities with a VA loan. Make use of it, and kick start a new adventure! The very best to all three of you and others that serve! Happy New Year!

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    John Murray from Portland, Oregon
    Replied 21 days ago
    Tropic Lightning Wolfhound here (M-16A1 Crowd), thanks for your service. Same old story buy low, hold, and sell high. Keep your AGI low, depreciation high, expenses high, no earned income, and defer Capital Grains!

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    Jeff Bosaw Rental Property Investor from Saint Louis, MO
    Replied 20 days ago
    I feel for anyone just starting out. The house hack multifamily is the way to go. I would not even be too picky about hitting 10% ROI or beating the 1% rule. Just utilize VA or FHA or Fannie Mae Home possible Loans to get something with low money down. Let your tenants pay your mortgage and start saving for a new building every 2 years while your young and don't have a bunch of crap to move each time. Sell before 5 years for no tax on the appreciation or hold long term and utilize 1031 exchanges when the market is in your favor.

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    Paul Moore Investor from Lynchburg, VA
    Replied 10 days ago
    Hi Matt. Thanks for serving our country and for writing such a concise, understandable article. Great job.

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