Five Ways to Earn Wealth Through Rental Real Estate

Five Ways to Earn Wealth Through Rental Real Estate

In conjuction with other investments, the primary benefits of investing in rental real estate is that there are many means in which wealth can be accrued. When combining these figures into a total return on investment, which may be considered the “internal rate of return”, those speculating in rental real estate can better understand why investing in this sector makes good sense.

With that in mind, here are the five ways in to earn wealth through rental real estate :

APPRECIATION OF REAL ESTATE:

So, if your rental property appreciates from $100,000 to $110,000, your rental home has appreciated 10%. This means you have obtained a 10% return of your downpayment as well as a 10% return on the mortgage you have from the bank. Assuming you had a 20% downpayment ($20,000) this means your financial leverage brought you back $10,000 on $20,000 or a 33% return on your investment!

RENTAL CASHFLOW ON REAL ESTATE :

Perhaps the most common sense reason for investing in “buy and hold” real estate is because of the profits generated from actually renting the property. To calculate this figure, you will take monthly rent and subtract expenses (mortgage, property taxes, insurance, vacancy, utilities, and maintenance). The leftover amount is the residual income your rental home has generated.

Let’s assume the rental home profits $200/month after expenses. That means $2400/year in profit from rental income. To determine rate of return (cash on cash return) of the initial investment of $20,000 on the $100,000 home, we divide $2400 by $20,000 and obtain a figure that is 12% return on investment! 

PRINCIPAL PAYDOWN OF MORTGAGE :

Assuming you do not have an interest-only mortgage, your principal on your mortgage gets paid down monthly from the tenant making their timely rental payment. On the purchase on your $100,000 rental home – you have a total mortgage of $80,000 and let’s say it is amortorized over 30 years at 5.00%. Over 12 months, the landlord will have paid off $1281.00.  Dividing $1281.00 into the initial investment of $20,000, this means a 6% return on investment!

TAX BENEFIT THROUGH OWNING RENTAL REAL ESTATE :

Unhinged by the tax reform of late 2017, owning rental real estate still provides great tax benefits to landlords. This means landlords will complete a Schedule E at tax time and will find they can write off expenses from rental income.  This includes leasing fees, property management fees, repairs to property (not considered capitalized expenses), etc.  This Schedule E income, or decrease in total income, brings tax benefit to landlords on their annual tax return.

Back to our example of the $100,000 rental home purchase, when we take the average tax benefit which can be a bit hard to measure, we can take a conservation figure of 5% return on your investment!

INFLATION LEVERAGE

Courtesy of the mind of Keith Weinhold (host of a fantastic podcast), inflation is another benefit to landlords who “buy and hold” their rental real estate and do not refinance the property.

Just as inflation erodes the value of the dollar in your pocket, the fixed nature of the mortgage on the rental property also gets eroded by the nature of inflation. This benefits the investor over time.  Again, a bit hard to measure, but, let’s use a conservative figure of 2% to inflation over time and in the first year of the $100,000 rental home purchase.  So, this means the total return on this portion of the investment is    2% as a return on your investment!

In summary, here’s the breakdown of the 5 ways in which our example piece of real estate at a $100,000 purchase while evaluating the initial $20,000 invested :

  • Appreciation of home in year one : 33% on $20,000 invested
  • Rental Cashflow of rental real estate : 12% on $20,000 invested
  • Principal Paydown of rental real estate : 6% on $20,000 invested
  • Tax Benefit of rental real estate : 5% on $20,000 invested
  • Inflation Leverage : 2% on $20,000 invested

Thus, based upon the $20,000 invested in the $100,000 rental property, this means an overall return of 58% return on the total dollar invested. Can you find another investment that can provide a return such as this?

If you can, leave us a comment!  If you find a means to test this calculation or if this calculation inspires you to enter the world of “buy and hold” rental real estate, leave us your thoughts. Fun stuff!