Many people believe that rental properties are a fool-proof way to earn money. While it is true that they are profitable, they can still end up backfiring, especially if you do not understand how they make money.
In this article, we discuss how rental properties make money. By understanding this, you can make smarter and wiser decisions, especially when investing in real estate.
1. Net Income
This is the one way that rental properties make an income that most people are aware of. Tenants who rent the property will pay a fee to the landlord or the property owner. After paying off all the expenses like bills and repairs, the property owner is left with a net income, which is now considered their earnings.
If you are planning to rent out a property, you may think that this is the main and only way to make a profit. However, there are also several other methods that not many people are aware of. While these ways are more passive and less noticeable, it is important to also know them.
2. Inflation Protection
One of the reasons why rental properties are so highly profitable is because they are protected against inflation. When prices rise as the currency weakens, rental properties are one of the things that are expected to become more expensive, as well. You can raise the rental fee of the tenants, and this will not be questioned because it is justified and valid during a period of inflation.
Of course, you will need to raise it to a reasonable price, as well. There are equations that could help you calculate how much you should raise it to hedge inflation. However, we also recommend that you consult with finance experts, as well before doing this on your own, especially if you are not knowledgeable.
3. Writing Off Taxes
A lot of businesses have to pay higher taxes, especially when they are earning a big amount of cash. However, rental properties are more advantageous in this aspect because they can write off their taxes by deducting expenses on the property.
Most of your expenses on the rental property, such as repairs, maintenance, and more, can be written off in taxes. You can write off a lot of this, and you could end up with zero taxes. Aside from that, you can also write off the depreciation value of your property if it has depreciated over time.
When we talk about appreciation, it means that the value of the property has gone up over time. Not only does this make it a good sale if you end up selling, but you can also be justified in raising the price of rent for tenants or people who are interested in renting out your property.
You can find out if your property value has appreciated by having it assessed by a professional. They should be able to tell you what your property’s standing is and from there, you can make a smarter and more strategic decision.
If you plan to rent out properties, you must understand how they make a profit. With this article, we hope you learn more about rental property profits, and you can make smarter investments and financial decisions.
If you need help investing in real estate, you can contact us at Evergreen Investments. We connect owners to wealth-building opportunities and make sure to guide you along the way. Contact us to learn more about our services.