Today’s REI Classroom Lesson
Matt Bowles lists and explains 5 benefits of buying and holding property, including cash flow and leverage.
REI Classroom Summary
When you buy strategically and hold onto properties to use for rentals, there is a multitude of advantages, as Matt Bowles discusses.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Matt: Hey, everybody. It’s Matt Bowles here from MaverickInvestorGroup.com and I am the host of the REI Classroom. Today, we’re going to be talking about the five unique benefits to buying and holding residential investment property.
Matt: The first unique benefit is cash flow. If you buy your property right, then when your tenant pays the rent every month that should cover all of your expenses associated with the property and provide a passive stream of income for you. That is your positive cash flow. It’s passive because you don’t have to work for it. It’s residual because it flows to you every month.
As soon as you sell the property, that stream of income stops entirely. So holding your properties over time is like a goose that lays golden eggs. As you buy more and more and more properties, the stream of income gets larger and larger and covers more and more of your living expenses passively, without you having to work for that money.
The second unique benefit is appreciation potential. Now, I say “potential” because appreciation is never guaranteed in real estate. It’s purely speculative, but you can strategically choose to buy in the path of growth. Look where people are moving in. Look where jobs are being created. Look where demand is increasing and you can choose to buy at strategic points in the property cycle, when markets are in a recovery cycle when home prices are going up, and so forth. So it’s a potential profit center for you if you’re holding your property over time.
The third benefit is tax advantages. The government incentivizes you to hold your rental property. It is the most tax-advantaged asset class in the country and one of the most profound benefits is depreciation. So the government allows you to depreciate your property over time, even if it’s going up in value. So the way that works is you first have to subtract out the value of your land because you can’t depreciate land value, and then you come to your structural value.
Let’s say the value of your property’s structure comes out to be $140,000. Well, the government will allow you to depreciate that over 27 and a half years.Okay? So that’s about a $5,000 phantom loss per year. It’s called a phantom loss because you didn’t actually lose anything.
Now, let’s say in terms of your cash flow, you’re making $400 a month in positive cash flow after all of your expenses are paid. Well, that’s $4,800 a year. Normally, that would be taxable to you as income. But you could take your $5,000 phantom loss and write off that positive cash flow against your loss and wipe out, potentially, your entire tax obligation. Okay?
Now, this is not tax advice. I am not a tax professional. Disclaimer, you need to consult your own CPA about your individual situation and, of course, tax laws change all the time. But it is incredible what the government incentivizes you with to hold your rental properties.
The fourth unique benefit is leverage. Holding rental property is also the most debt-favored asset class in the country, meaning that banks are willing to finance, oftentimes, up to 80% of your purchase price when you buy and hold rental properties. Now, that means a couple things.
Number one, a lot less money out of pocket for you. Okay? If you’re putting 20% down plus closing cost, that’s a lot less than buying the whole thing for cash. That could also help to increase your cash on cash return. How much money are you making based on how much you put in out of pocket?
Finally, if you have a tenant that’s paying you rent every month and their rent is covering your mortgage payment and you’ve got a principle and interest mortgage payment, like a 30-year fixed, guess what? The tenant’s rent is paying down the principle balance of your mortgage every single month. So if you own that property for 30 years, and the tenant’s rent covers your principle payment to your mortgage every single month, then 30 years from now, guess what? You’ve got a free and clear property and the tenant paid down your entire principle balance of your mortgage.
The fifth unique benefit is the hedge against inflation. As a savvy investor, you not only need to build your wealth, you need to defend it against inflation. Real estate holding rental property is one of the only asset classes in the country that has a built-in hedge against inflation. Because home prices rise with inflation, and also rents rise with inflation and you can adjust your rents and increase them every year or every two years when you are renewing your leases.
In addition to that, if you do borrow money and take out a mortgage against the property and have it fixed for 30 years, guess what? You’re borrowing that money in real dollars, today’s dollars, and if the value of the dollar declines over time, you’re paying the bank back in those reduced nominal dollars in the future. So you also benefit financially from that. You win, the bank loses.
So there you have it, the five unique benefits of buying and holding residential investment property. I’m Matt Bowles and you can find me at MaverickInvestorGroup.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
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