Working with numerous rental property owners, I’ve often seen a common misconception regarding the true benefits of owning rental properties. While most owners understand the basics like cash flow and property appreciation, there are three other significant ways that real estate can build wealth—often flying under the radar.
Here are five unique ways real estate can increase your wealth:
Cash Flow, Appreciation, Tax Advantages, Amortization, and Leverage.
1. Cash Flow
Cash flow is the net income generated from your rental property after all expenses are accounted for. It’s calculated as follows:
Cash Flow = Rental Income – Expenses
Expenses include mortgage payments, property management fees, maintenance, repairs, utilities, insurance, and any vacancy costs.
For example, depending on the property’s age and condition, maintenance and capital expenditures can make up anywhere from 10%-25% of the annual rental income. Accurately estimating these expenses ensures you make realistic cash flow projections, setting you up for more informed investment decisions.
2. Appreciation
Over time, property values tend to increase, especially in high-demand areas like Santa Cruz. This appreciation can lead to significant returns on investment. For example, a 5% annual appreciation on a $1,000,000 property means a $50,000 increase in value every year.
Cash flow-focused investors may not always understand appreciation-driven investors, thinking their approach is too long-term.
They often prioritize immediate cash returns, treating appreciation as a secondary benefit. However, appreciation-driven investors might view things differently, expecting the value of their property to steadily rise over time.
The reality is, both approaches are valid. Historically, property values have grown by an average of 5-6% annually. That means a property worth $1 million could appreciate by about $50,000 a year. Meanwhile, a property worth $135,000 in another region might only increase to $15,000 over five years, offering a smaller but steady return.
3. Tax Advantages
The tax benefits of owning rental real estate are substantial but often misunderstood. A key tax advantage many don’t fully grasp is depreciation.
Annual Depreciation = $500,000 / 27.5 = $18,182
Expense Deductions: You can deduct a range of expenses, including repairs, maintenance, property management fees, and even travel expenses related to your property. These deductions can greatly reduce your taxable income, often allowing you to show a loss on paper even while enjoying positive cash flow.
4. Amortization
Amortization refers to gradually paying down the mortgage principal over time. Each payment increases your equity in the property.
For instance, if $1,500 of your monthly mortgage payment goes toward the principal, that’s $1,500 in equity growth paid by your tenant. Even if your property has a negative cash flow of $500 per month, the real financial benefit can be considered +$1,000 when factoring in the equity gain.
5. Leverage
Leverage is the strategy of using borrowed capital, such as a mortgage, to maximize your potential return on investment. It allows you to control a larger asset with a smaller down payment.
For example, on a $1,000,000 property with a $200,000 down payment and $800,000 financed, you would still see a $50,000 increase in equity from a 5% appreciation, based on the full property value—not just your initial investment.
Additional Benefits of Leverage:
Home Equity Line of Credit (HELOC): You can tap into the equity in your property to secure a loan for renovations, improvements, or to buy additional properties—all while deferring taxes on the borrowed equity.
Why This Matters
Owning rental property can sometimes be challenging. That’s why our goal at Andren Homes is to make property management as smooth as possible for you. When real estate isn’t a burden and is working as it should, it becomes an amazing wealth-building tool. However, it requires time and patience, so staying in the game is key.
One way to avoid burnout is by recognizing all the ways your investment is working for you. Even if you’re not seeing the cash flow you hoped for immediately, you’re still benefiting from amortization, leverage, tax advantages, and appreciation. Understanding these benefits will keep you motivated and focused on the long-term rewards.
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Logan Andren
Logan Andren is the founder and CEO of Andren Homes Property Management. Since launching the company, Logan and his dedicated team have simplified the rental property experience for numerous Santa Cruz homeowners. Their mission is to enhance the lives of their clients and community, focusing on providing exceptional service and fostering lasting relationships. DRE #02002055
Get in touch with us:
✆ : (831) 291-5043
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