The 5 Profit Centers of Rental Homes
Rental Homes Pay You Five Ways, Not Two — and the Fifth One Is a Recent Addition
By BRIAN BEAN
Rental Home Advocate | Property Manager | Real Estate Broker
When talking about rental homes, most people focus on the two most common financial measures: Cash flow and appreciation.
But did you know there are actually FIVE profit centers in residential rental properties? And they all can help investors build generational wealth for themselves and their families:
APPRECIATION: In California, we are all aware of the power of time, value and real estate. Prices may ebb and flow in the short term, but long term, keep looking upward.
CASH FLOW: The monthly income you receive in rent payments is most tactile and frequent. Pay the property expenses, including your mortgage!
TAX ADVANTAGES: When you have a rental property, you have your own business. And the tax benefits that go along with it. Virtually every expense of the property, plus DEPRECIATION, which is the magic ingredient come tax time (check with your tax professional for specific advice).
PRINCIPAL PAYDOWN: Those rent payments applied to your mortgage payment each month systematically extinguish the debt on your asset, building your equity along the way.
HEDGE AGAINST INFLATION: A recent addition to the Profit Centers, as inflation has ballooned, so has the devaluation of the dollar. There’s no better place to be in a high-inflation environment than real estate, which rides the tide and keeps your portfolio from going under.
At Dream Big Property Management, we’re not just a garden-variety management company.
We Transform Rental Homes into Life-Changing Wealth. We have our eyes on ALL FIVE profit centers in rental properties, and our goal is to help you build your rental portfolio.
If you are a rental home investor in the Inland Empire and you want to provide clean, safe, well-maintained homes, give us a call today at 951-778-9700 or email info@dreambigpm.com to discuss how we can work together to help you acquire, maintain, and generate increasing income in your real estate holdings.
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Full Transcript
Transcript of the video above — Brian Bean, Broker/Owner and Rental Home Advocate, Dream Big Property Management. CA DRE #01346382. Lightly edited for readability.
Hi, I’m Brian Bean with Dream Big Property Management in Riverside, California, here again with another lesson in uncommon knowledge. When talking about rental homes, most people focus on the two most common financial measures: cash flow and appreciation. But did you know there are actually five profit centers in residential rental properties? That’s right, five. And they can all help investors build generational wealth for themselves and their families. So let’s go through them one by one.
First up, appreciation. This one is the most widely acknowledged, especially for investors in California and other states on the edges of the United States, where real estate values can swing wildly, but over time they increase at incredible multiples. If appreciation is your investment target, they say you make money not when you sell but when you buy. Buy low, sell high, right? But here’s the better news: appreciation also works if you just buy and hold for your heirs. This is your net worth, your money on paper, your rainy day fund. Play the long game for your best odds.
Number two, cash flow. This is the monthly, or daily, or weekly if you’re into short-term rentals, income that your rental property generates from tenants. It helps cover your monthly utilities, taxes, insurance, maintenance, and for investors who use financing to purchase or withdraw equity, it helps you make your mortgage payments. Cash flow is your most tactile and frequent benefit, funding the operations of your rental empire business.
Number three, depreciation and other tax advantages. This is one of my favorites. When you have a rental property, you have your own business, and the tax benefits that go along with it. Virtually every expense of the property is a write-off against the income. Plus, for those who qualify — and make sure you consult with your tax professional — depreciation is the magic ingredient come tax time. It’s the on-paper write-off that helps reduce a rental home owner’s tax liability at the end of the year.
Number four, principal paydown. So this one applies if you have financing of any kind on your rental property. If you borrowed money to buy a property and then leased it to a tenant, the tenant’s rent payments help pay off that mortgage month after month after month. As time goes along, your debt decreases and your ownership equity increases, a month at a time. Ten or 20 or 30 years later, your tenants paid off your loan. You now have an ATM you own free and clear, spitting out cash every month. Doesn’t get any better than that.
Number five, hedge against inflation. Once long forgotten in the age of low inflation and lower interest rates, assets that keep pace with the value of the dollar are a great investment. As consumer prices the past couple of years have ballooned, more than 10% last year, cash in the bank is worth less and less. But guess what didn’t drop the past few years? That’s right, the cost of a home. Because housing prices are the ship that rises on the tide of the US dollar. If a gallon of milk and a pair of Levi’s cost more today than last year, the value of your real estate also costs more.
Here’s the thing. Home prices have jumped the past few years, but some economists say the value of homes hasn’t changed. It’s the value of the dollar that has dropped, and consequently it just takes more of those degraded dollars to buy the same thing. Maybe not as bad as a wheelbarrow full of rubles to buy a loaf of bread, but you get the point. So during inflation, assets like real estate tend to be a good place for your money.
And those are the five major ways to make money with rental homes. At Dream Big Property Management, we’re not just a garden-variety management company chasing rent and collecting fees. We transform rental homes into life-changing wealth. We have our eyes on all five profit centers in rental properties, and our goal is to help you build your rental portfolio.
If you’re a rental home investor in the Inland Empire and you want to provide clean, safe, well-maintained homes, give us a call today at 951-778-9700. Let’s talk about how we can work together to help you acquire, maintain, and generate increasing income in your real estate holdings.