1. Cash Flow

The first and most obvious way to make money owning rental property is cashflow which is the difference in rental income minus expenses such as mortgage, property taxes, insurance, repairs, maintenance and vacancy .

Typically, investors aim for roughly $200-250 per month in cash flow for every unit they own. For a 4 unit multi-family building, this would amount to $800 dollars per month in cash flow. Now imaging buying 5 cash flowing multifamily properties — thats well more than enough to retire for most people.

2. Mortgage pay-down

In rental property investing, your tenants are paying down the mortgage so that your equity in the house increases every month. Even if the property does not increase in value over the years, you will still make a significant amount of month through paying down the mortgage.

Your mortgage payment is made up of 2 parts, principle and interest.

The portion of principle in your mortgage increases every year.

The table below is an amortization schedule for my first rental property. As you can see, mortgage payments for the first year (payments #1 to #12), my tenants are paying down between 471.52 to 489.66 of my principle every month! By the end of the first year, I’ve gained over $5,766 in equity.

Also notice in the second year, that i gained about $6,008 in equity the second year

Hopefully, by 30 years, my tenants will have paid down all the mortgage principal so that I will own the rental property free and clear!

3. Tax Benefits

Rental property owners pays fewer income taxes on real estate investment than most other investments. The US federal government allows real estate investors to depreciate their investment property of a time period of 27.5 years (residential properties)

For example, if you purchased a rental property for $350,000, and you would like to see how much you would save in tax benefits. First you would need to calculate the value of the improvements (rental property purchase price – value of the land per public records) once you have the value of the improvements, divide that number by 27.5 years then you will be able to expense from your gross income every year until 27.5 years.

4. Appreciation

You should never rely on appreciation to make a real estate investment profitable. Just expect that real estate values will appreciate along with inflation over the long term, any appreciation higher than inflation should be considered a gift.

Appreciation rates depends on a variety of factors include location, rent growth, and property condition. Your rental property will appreciate as new jobs are created attracting more people, increasing the demand for rentals.

4.5. Leverage

Leverage occurs when you borrow money to finance a larger property than you could afford if you were to pay all cash.  Leverage allows you to multiply your return on investment when the value of the property goes up in value. For example, a $350,000 property that goes up in value by just 5%, equates to a value increase of $17,500.  While this is just a 5% increase in the value of the property, if you only have $105,000 invested (down payment plus closing costs) your actual return on investment (ROI) as a result of a 5% price appreciation is a whopping 17%!

1. Stay invested so you won’t miss the market’s best days

Time in the market is always better than trying to time the market.

The common phrase “Buy Low; Sell High” is actually extremely difficult to do. Stocks routinely recover from short-term crisis events to move higher over longer periods of time.

If you would have invested $10,000 in the S&P 500 in 2003 and stayed fully invested for 15 years, you would have made $15,230 more than someone who missed the market’s 10 best days.

Your $10,000 investment in the S&P 500 in 2003 would be $30,711 in 2015 but if you tried to time the market and mixed 10 of the best days, then your account would only be worth $15,481.

2. Buy Low Cost Index Funds

In 2008, Warren Buffet made a $1 million dollar bet with any hedge fund that a low-cost Vanguard S&P 500 index fund would outperform any 5 hedge funds over a period of 10 years. In the end, a low-cost Vangaurd S&P 500 index fund beat the hedgefund – it wasn’t even close.

Historical data consistently shows that actively managed funds (mutual funds, hedge funds, etc) underperform their benchmark index.

As you can see in the table below, 92.15% of all large-cap funds underperformed the S&P 500 over a 15-year period.

Why pay an actively managed fund almost 1% in fees just to underperform the S&P 500 which you could buy for as low as 0.04%?

This also applies to average investors individually picking stocks. If large institutions who employ smart PhDs and MBAs to analyze company can’t beat the S&P 500, what makes you think you can?

If you can beat them, join them. Low cost index funds are the clear winners.

Stop paying commissions to buy stocks

For newer investors who aren’t buying thousands of dollars worth of shares per trade, commissions will definitely lower your returns. If you’re paying $6.95 dollars in commissions to buy $300 worth of stocks, you’re automatically starting at 2.33% loss.

M1 Finance is one of my favorite investing platforms because they offer buying fractional shares with your earned dividends. Although M1 finance requires a value of at least $10 before a fractional share can be purchased automatically, it is still magnitudes better than other brokages don’t allow factional shares. Sign up using this link to get $10 FREE