When it comes to real estate investing, there are really two categories – investing for capital gains and investing for cashflow. Capital gains investing includes strategies where properties are bought and subsequently sold for a capital gain. Cashflow investing on the other hand involves purchasing properties and holding them to collect the cashflow they create.
Each strategy offers benefits but if you are trying to build wealth, then investing for cashflow is the strategy you must choose. The reason for this is because cashflow investing offers five different ways to profit from the investment.
As the term implies, cashflow investing creates a monthly passive income from the rent that is collected on the property. There are expenses like taxes, insurance and property management, but if purchased right, the rental income from the property should pay these expenses and also provide a monthly cashflow.
Many investors do not think of appreciation when they invest in rental properties. However, over time as a property appreciates it creates equity that the property owner can borrow against.
Depreciation is an expense the government allows you to take which covers the loss in value to the property due to wear and tear. The great thing about depreciation is that it is what is called a paper loss, meaning you do not actually pay for this expense. You are allowed to claim the expense though, and thus your taxes are lowered. At the time of writing, the US Government allows rental property to be depreciated over 27.5 years. For example, if you purchase a property for $27,500 you would be able to claim a $1000 depreciation deduction against the property every year for 27.5 years.
4. Interest Deduction
If you mortgage the property you are purchasing, the interest paid on this mortgage is deductible thus reducing your taxes.
5. Principle Reduction
If you mortgage the property, the rental income the property generates will pay your mortgage payment. Your tenant is effectively paying for the property on your behalf.
Because of these profit centers, cashflow investing is a great way invest in real estate, and if you purchase multiple properties it can be a great way to build wealth. However, setting up rental properties is not necessarily a straightforward thing to do. To be successful, an investor must have the knowledge on all of the following:
- Where properties should be purchased
- How to renovate the property to demand the highest rent
- How to screen tenants properly
- How to properly manage the property
Fortunately there are companies out there like Memphis Buy And Hold that offer real estate investors the opportunity to purchase “Turnkey” rental properties in great markets like Memphis. As the name implies, a turnkey property requires nothing more than the investor to purchase the property and start collecting rent checks. Finding the property, renovating, tenant placement and installation of the property management company are all taken care of by Memphis Buy And Hold. The only job the investor has once they purchase the property will be to cash the monthly rent checks.
Derrick is a Memphis native specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 8 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More…… www.memphisbuyandhold.com