Your investment in rental can build your wealth in different ways: cash
flow, appreciation, equity build up and tax shelter.
Cash flow is money available for you to spend after the costs o the
investment are paid. This is income, a little like dividends from stocks.
Appreciation is the increase in the market value of your investment.
Obviously, this increase depends on your local real estate market, which
normally continues to increase. Fortunately you have some control over he market
value of your property. If the market place a premium on well-kept, attractive
yards and buildings, you can maintain and enhance the condition of your
properties, adding substantially to their value.
Equity is the difference between the market value of your property and the debt
against it. If you own a property free and clear, your equity equals its market
value. If you borrowed money to buy the property, your equity equals the
difference between market value and your mortgage balance. As you pay off the
debt, using your rental income, your equity increase. Both the market increase
and the mortgage decrease add to your equity in you rentals.
The magical part of investing in rental properties is that your renters are
actually paying off your debt and increasing your equity. If you maintain
attractive rentals with competitive rents, you will find people lining up to
help you pay off your loan. Just try to find someone willing to help you pay for
stocks you bought on margin.
Tax Shelters are specific categories of deductions that help you lower some
of the tax you pay to IRS. Mortgage interest and depreciation on your property
are two tax shelters provided by rentals. A specific tax-shelter advantage
of real estate is depreciation. The IRS allows you to deduct a percentage of the
original cost of the property from you gross income each year, on the assumption
that buildings have a finite life span and are "wearing out." Real Estate
provides one of the major tax shelters recognized by the IRS.
