Money in the bank is STILL worst than in a bad real estate deal

Like many of my posts when I see topics of conversation become more common and I find myself explaining it more, I like to write blog posts and then just refer others to the posts.  One of the things I have seen primarily from newer investors is after 1-2 years of looking at their real estate investment they will get impatient and start staying "I'm not making any money or I'm only making $100 a month."  To that I like to point out that $100 a month is still way more than what they are making in the bank, but lets take a closer look at this myth.  As always I like to use an example, so I'm going to use a duplex I purchased a couple of years ago.  This duplex was purchased with only 24,000 down at a purchase price of 175,000.  If you want to know how I purchased it for so little money down you can refer to my other blogpost, BRRR? Why not try the BRAT!

Now this property is actually performing very well for me, but let's just say it was only making $100 a month for me  and also I bought it with 25% down rather than cashing out and boosting my cash on cash return.

So in this example if you look at $100 a month on 43750 down and let's say 2000 closing costs, your cash on cash return would be 1200/45750 which would be 2.6%.  Not that great on the surface but definitely better than your typical bank account.  Now let's get into the other benefits of real estate.

While you are not writing off the entire payment of your mortgage, you are writing off interest, and benefiting from principal paydown, appreciation of the real estate and depreciation.  Using this example,  the depreciation taken from this property is $4241 and mortgage interest of $464 a month with $180.83 towards principal.  Considering all these additional writeoffs, you would likely be taking a net loss on your property on your tax return resulting in no taxation on the $100 of income but also a tax deduction against your other income.  For this property after factoring in all your expenses, you would likely still be taking a loss of around $800 or more on your tax return.  In a 25% tax bracket, that's another $200 a year, plus another, $2160 of principal paydown, and then that's not even factoring in appreciation.  In this case, the property actually appreciated about 7% a year, but we will use a more modest 3% appreciation.  That's an additional $5250 of equity created.  While these returns are not actually realized upon sale after factoring in $200 a year in taxes saved, $2160 a year in principal paydown, $5250 a year in appreciation and $1200 a year in actual income. Your net return is $8810, including realized and unrealized gains.  Factoring that back into your cash on cash return on $43750 and you are looking at over 20% return on investment.

Meanwhile, while you could have 1% return on 43,750 making 437.50 a year you would then be taxed on those gains.

For some people, they do not want any risk at all, or they don't want to even be bothered with looking an additional statement from their property management company and that's understandable. But imagine if you get a good investment, or cash out refinance how the power of real estate can really add up. In this case, the property appreciated so much I actually refinanced all my money owed in just over 2 years and then some so my cash on cash return is infinite.  If you are reading this, there is a good chance you may already know many of the benefits suggested but if you don't take a look at the other benefits on your tax return and be patient and give your investment some time to show you the benefits of real estate.  

19,000 down

4241 Depreciation

Mortgage Interest 7298