I’ve been doing some thinking about the hidden profits to be enjoyed by the brave-soled real estate investor. Often it feels like I’ll have a month where something goes wrong (one of my tenants abandons the house and leaves all there worthless crap without paying rent). At times like these the cash flow might not work out for the month, but I find peace in hidden profits. Let me explain:
There are at least three common ways that real estate investors enjoy profits that don’t show up immediately in cash flow: amortization, appreciation, and tax benefit.
Amortization is my personal favorite of the hidden profits, because it is guaranteed to make the long-term real estate investor very wealthy. True, it might take 30 years, but start early and avoid the temptation to take out those second mortgages when you get a little equity. If you are tempted, stop, think, and use your creativity to make even more money while preserving your equity.
Appreciation is a fun one, but don’t bet the farm on it. I’m well aware that many people made their millions based on real estate appreciation, and I’m hoping that our friend appreciation kicks in a little for me too. Remember that appreciation is a double edged sword; if you never plan to leave the real estate industry, over the long run it might hurt you on purchases as much as it helps you sales. I know that all of us feel like we have a good idea about what prices are going to do, and we are probably right, but there is a chance that that feeling is nothing but indigestion.
Now the boring one: the tax benefit associated with owning real estate can be the best of all the hidden profits. I’m not sure why Uncle Sam is letting us take depreciation on assets that typically appreciate, but we might as well take advantage of it. In my book Heaven is that wonderful place where you realize a positive cash flow and have negative taxable income. If you are doing it right, depreciation will provide this heaven on earth. If you are not phased out (and if you are phased out, I don’t feel sorry for you) you can take up to $25,000/year of rental real estate loss against other ordinary income. At current rates, under that scenario, not only is all of your rental income tax deferred, but you may be able to put a nice check in your pocket each year at tax time (and if you have the discipline to put that money back into real estate, you actually deserve to be rich).
Now before I hear the criticism, let me tell you all that I know that cash flow is king. These are just a few ideas to lift your spirits when king cash flow is visiting someone else.
Thanks ya’ll for reading. I’d love to see some discussion/examples go back and forth on any of these topics. Investors Workshops has been great to provide the site, but much of the content is only what we make of it.
Tell me what you think about Spencer post and the hidden profits.