Do you ever wonder why you just cannot seem to make any money on your rental property? Let’s talk about it.
Why a Rental Property Does or Does Not Make Money
First of all, you have to understand that there are five ways that you’re going to make money in real estate—and not all of them have to do with cash flow.
5 Ways to Make Money in Real Estate
1. Cash flow
The big misconception that a lot of people have is that if your property is not cash flowing, you are not making any money. And if you’re not making any cash flow, you’re losing money. However, you have to understand, cash flow is only one piece of a five-part puzzle.
Next, you have equity capture. That’s when you buy the property for less than what it’s worth. Therefore, when you actually close on it, you’re capturing equity at that point.
Related: What Is Cash Flow Anyway?
You also have depreciation. If you have a job and you’re able to depreciate the property, you were able to get tax advantages for depreciating that asset.
4. Debt paydown
There’s the debt paydown, as well. You have a tenant in that property. That tenant is paying down your debt to zero. If it’s a 30-year mortgage, eventually you will owe nothing on that property, and the tenant will have paid that down.
Last but not least, there’s appreciation. No matter what you do, properties are going to go up in value. Think back 30 years ago. If you could go back in time and buy a property—or 10 properties—where you grew up, you would be thinking a lot differently based on appreciation. You would not even really be concerned about the cash flow.
So when you say that your property is not making money, you want to be very careful. It may not be making you immediate cash flow, but you have a tenant in the property paying down the debt. You are getting the tax advantages and you’re depreciating it. You are getting appreciation, because it’s going up in value. And if you bought it correctly, you are getting some equity capture.
The one thing you may not be getting is cash flow. But as you can see, this is not the end of the world.
Real World Example
One day, an owner was telling me that their property was not making them any money. His perception was he was losing $200 a month.
And yeah, that was the reality. He was losing $200 a month.
But after we started talking about this particular property—which was in a major downtown area that was going up in value—he realized that even though he was losing a couple hundred dollars a month, the money that he was making on appreciation totally eclipsed anything that he was losing on a monthly basis.
So yes, he was laying out a little bit of cash, and he had what’s called a “negative geared property.” However, what he was not thinking about were the other ways that he was making money.
It’s not the fact that your property’s not making you any money; it’s the fact that one of the five is not making you money. Chances are, it’s making you money other ways—you’re just not thinking about it the right way.
Don’t focus just on cash flow. Look at all the other variables—those that you may have considered when looking into buying it in the first place.
And again, if you have maintenance on your property—let’s say you have to replace the air conditioning unit or the roof or the hot water heater—those are called capital improvements. That is going to improve the property. It’s not a loss. You’re actually making the property worth more money.
Remember, just because you have to outlay cash or maybe you’re losing a little bit of money every month, as long as the other factors come into play—cash flow, equity capture, debt paydown, depreciation, and appreciation—that’s probably not the case overall.
Think of all those things before you decide that your property is not making money. If you do look at all those things and you still decide that it is not making you money, guess what you can do? You can very simply sell the property.
There’s nothing that says that you have to hold onto a property just because you own it. There’s always an exit strategy. Sometimes the exit strategy is just getting rid of it and taking that money and turning it into a better deal that will make you money.
And more importantly, the mental stress that you’ve got to deal with. Whenever you have a property that you’re upset about or that’s bothering you, it’s always in the back of your mind. If that’s happening to you, it’s not worth it.
Sell the property, take the money, roll it into a better deal. And now you’re able to buy something that is better energy for you, and you’ll feel a lot better than you currently are.
Hopefully this information was helpful!
Let’s discuss below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.