Category Archives: 4 Benefits of Real Estate Investing

Once again, the Four Benefits of Real Estate Investing are as follows:

1. Cash Flow Before Taxes
2. Principal Reduction
3. Tax Benefits/Depreciation
4. Appreciation

Cash Flow Before Taxes
Take your total monies collected, subtract ALL of your expenses and what you have left is Cash Flow Before Taxes.

Principal Reduction
The amount of principal your loan was reduced by in any given period of time.  If the house is empty, you are reducing the principal.  But if you have tenants in your rental property then THEY are reducing your principal.  Be sure to thank them!

Tax Benefits/Depreciation
Your Net Operating Income minus your interest paid minus your depreciation schedule gives you a number.  Take that number and multiply by your tax bracket.  If it’s a positive number that is your tax.  A negative number is your tax savings.  Cool, eh?

Appreciation
A lot of people think this is where the money is made.  And it can be.  But take my word for it.  You need to make sure whatever property you buy makes sense based on the previous three benefits.  Then if you have hard times you still have positive capital growth.  When we return to good times this will be the icing on the cake that allows you to eat at Ruth’s Chris rather than the Sizzler. 

Kansas City real estate investing needs not to be complicated.  Just know the returns you are after, plug in the numbers and see if they work.  If the numbers don’t work you move on.  If they do work you’ve probably just identified your next investment property. 

Depreciation is your friend when it comes to owning rental property.  First, because it is an investment home you get to depreciate it over the course of 27.5 years.  (Well, not exactly, but the government is involved.)

Let’s just say you purchased said rental property in January of 2008.  The property is a duplex in Olathe and was purchased for $200,000.  Looking at the property tax breakdowns for the neighborhood we can see that the land value of nearly every duplex on the block is about 18% of the total sales value.  So we’ll subtract 18% from the $200,000 paid for our little duplex and we’ll have the amount we can depreciate.

Now, if you purchase an investment property eligible for depreciation in January you get to “write down” 3.48% of the depreciable (is that a word?) value of the rental.  So let’s figure quickly:

$200,000
$  36,000 – (18%)
_______
$164,000
  x    3.48%
_______
$   5,707

So we have a depreciation number of $5,707.  You get to subtract that, along with the interest you will pay on debt service, from the Net Operating Income.  And whatever that number is is the number you get to tell the government you made or lost on your investment property.

Follow?

Let’s make this more simple.  Take your tax bracket (28%?   33%?) and multiply it by the $5,707 number.

If you are in the 33% tax bracket you just saved yourself about $1,883 on your taxes for 2008.  That’s real money.

Of course, a professional accountant or CPA might get squeamish about  some of the terms I’ve used or how I’ve described it.  And there are rules you must follow and consequences for the benefit.  But I’m not off on my numbers.  However, always check with your professional tax planner/adviser.  I think he’ll tell you pretty much the same thing.  Depreciation is one of the 4 Benefits of Real Estate Investing. 

BBQ Capital is constantly adding readers.  How do I know this?  By the internal stat counter.  So one of the issues I like to revisit over and over and over and over again is the 4 Benefits of Real Estate Investing.

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Cash Flow Before Taxes.  Simple enough.  You take all of your income, subtract all of your expenses and what is left over is your cash flow before taxes.  For your Cash-On-Cash return you simply divide that number by the total amount of dollars you have put into the income property.

Principal Reduction.  Again, fairly simple.  Take the total amount you put towards debt service and subtract that portion that was interest.  What’s left over is the amount your tenant’s put on your rental house’s mortgage towards your retirement.

Depreciation.  This is a bit more complicated.  Especially if you accelerate your deprecation.  But in short, it’s an amount the government allow you to write down your investment property each year…so long as the depreciation schedule is in effect.  Do not overlook this benefit.  It’s major.

Appreciation.  What’s the property worth now.  Subtract what you paid for it.  That’s your appreciation.