Multiple streams of income from real estate investing ARE possible for you as an investor!
Everywhere you go you can see people looking for cash flow and other people promoting cash flow. Cash flow (especially today) is a beautiful thing. BUT real estate investing has multiple streams of income and all too often they are totally overlooked in favor of focusing on real estate investing PURELY for cash flow.
Let’s breakdown some of the multiple streams of income possible with real estate investing:
- Income: from your income you pay your expenses and what is left over is the positive cash flow. Most everyone grasps this concept and utilize this as their main tool within their investment.
- Deductions: your expenses for the property including property management fees, repair expenses and even your mortgage payments are deductible. In addition to this is the depreciation schedule. This is an IRS incentive put in place (I believe back in the Reagan years in the early 1970’s) as an incentive for investors like you and I to create affordable housing for people. Basically the depreciation schedule that is filed on your tax returns lets you depreciate the property over a number of years (27.5 years for residential properties and 39 years for commercial properties). What this means is you get a deduction. Here is an example of a 100k residential property. The house on the property is worth 100k divided by the allowable 27.5 year depreciation, in this scenario you would take $100,000 / 27.5 yrs = 3.63 or $3,630 of additional tax deduction. Add this to your other expenses and you have very significant tax deductions. As these tax deductions subtract for your annual earned income, you have generated a huge savings each year. This saving is a hidden income stream that should also be considered within your investing criteria. Seasoned investors definitely grasp this concept and this is how the rich get richer.
- Equity: equity build up, also known as principal reduction, occurs each month as you make your monthly mortgage payment. A portion of the payment of course goes to making the interest payment which is captured above as a tax deduction. The other part goes to reducing your principal. Of course it is basically the tenant making the payments for you and at years end they have made a partial payment toward the balance owed on the property. This is also a hidden form of income that is generated. Seasoned investors also grasp this concept.
- Appreciation: the 50 year national average for residential appreciation (capital growth) is 6%. On the above example of $100K property would mean 100,000 x 6% + $6,000. This 6% growth is yet another hidden benefit. Seasoned investors also grasp this concept.
- Leverage: when you borrow money form the bank to purchase this property you typically will finance 80% of the value (this has admittedly been harder lately). The 80% you borrow is leverage. On the above example, you borrow 80K to pay for your 100K purchase. This 80K of borrowed money goes to provide all the above benefits in the form of 80% leverage. Seasoned investors invented this concept. They always use somebody else’s money to make their purchases.
As you can see, there are 5 forms of income from 1 investment. No other investment in the world can provide these multiple returns. I like to call these five streams of income, “wealth building principles.” This is why I always say that real estate is an ideal investment. In fact, isn’t it ironic, if you look at the examples above and take the very first letter of each of the five wealth building principals you will get I.D.E.A.L.
Yes, real estate truly is an Ideal investment!
Take a look at this screen shot. The example above talks about a 100K investment. I have a calculator that actually computes these five wealth building principals so you can be purposeful with your investment and see what the five income streams are available:
As you can see most people look just for the cash flow which in this scenario is $5256.51.
Now take a look at the other 4 streams of income. The true returns of this investment are $12,010.10. Your true returns are over twice as much as anticipated. It is this very lack of purposeful diligence when evaluating investments for returns and sustained returns that has people missing the bigger picture.
Multiple streams of income from real estate investing is a reality that you can take advantage of if you know how.
If you are interested in utilizing this awesome tool you can see it here: