When I tell others that I’m a real estate investor, I’m often asked about the benefits of real estate investing and why I rave about it so much.  In no particular order, here are the five key reasons why I love rental property investing for passive income:

• Cash flow
• Equity capture
• Equity build-up
• Tax benefits
• Appreciation

Cash Flow

Investopedia defines cash flow as “the net amount of cash…moving into and out of a business.” and is my original and single favorite reason why I love rental property investing.  Broken down, cash flow is the difference between the monthly rental income and total expenses.  Cash flow helps produce a steady flow of income without having to constantly trade time for money while freeing you to do other things (work a full-time job, travel the world, spend time with family, start a business venture, etc)
Here’s is an actual example of cash flow for my first rental property:

*note the maintenance and vacancy costs are not actual costs but are ongoing estimates.

Equity Capture

People often say you make the most money in real estate during the purchase – I agree with this.  Equity capture is the single reason as to why I value real estate above other investment vehicles available.

With many other investments, you’re subject to the mercy of the market but in real estate you’re able to – in part – escape this.  Equity capture is the ability for you to purchase a home below market value and make money right as you sign the papers.  Without getting into too much detail here, some reasons why you’re able to do this are: people looking to cash-out quickly, distressed sales like foreclosures and short sales, fixer uppers, or maybe you were just there at the right time, with the right offer to buy.

Using the example of the home above, I was able to purchase this at $96,000.  The home was appraised at $132,000 and I was able to refinance all of my initial capital out (more on financing and investing with no/low money down in a later post).

Equity Build-up

Equity build-up refers to tenants paying down your mortgage and you gain equity (or ownership) of your home.

When you’re purchasing a home with a mortgage, the bank owns a portion of your home but this continues to diminish as the loan gets paid down.  The beauty of owning rental real estate is that you’re able to have your tenants gradually pay down your loan for you with their monthly rents!

Tax Benefits

This one might be a bit more complicated to explain but please bare with me here!

At a high level, the government understands that it doesn’t do a great job of providing affordable housing and therefore gives tax incentives to investors in order to promote rental housing.

I’m by no means a CPA or accounting expert but here are a few key benefits:

• Mortgage interest deductions – the ability to deduct the interest you’re paying on your mortgage off of your taxable income
• Depreciation – this one is huge and is the ability to deduct the value of your home over a certain period of time (27.5 years for residential homes)
• 1031 Exchange – let’s leave this alone for now but basically, this is the ability to defer capital gains taxes if you continue to reinvest your profits.

Let’s take the above home as an example again:

Assuming you’re at 25% tax bracket, that’s an additional $1,462.69 you made on top of your cash flow without adding to expenses – not to mention the other potential deductions!

Appreciation

The last one on my list is appreciation.  As defined by Investopedia once more, “Appreciation is an increase in the value of an asset over time”.

This basically means the value your home increases as time goes on and overtime, real estate has averaged ~5% per year (depending on where you get your numbers).

For this example, I’ll produce two numbers since the market has been extremely hot and might not reflect actual appreciation rates moving forward.

• Example numbers – Using the 5% benchmark, the $96,000 home from above becomes $100,800 after year 1 – a $4,800 profit from appreciation alone!  Caution here as I’ll go into detail at a later time as to why appreciation is not reliable.
• Actuals (note again – the market has been very hot) –  
  • Purchased in mid-2014 at $96,000
  • Appraised earlier this year at $245,000
  • Appreciation = $149,000

And there you have it, 5 reasons why I love investing in real estate with a real example in from my first purchase in Sacramento.

Comment below with your thoughts and subscribe if you’re interested in hearing more, won’t you?

– Andrew