Carolina Investment Property Blog

1. Cash FlowCash flow is defined as the money that you have left over after you have received rent from a tenant and paid mortgages, taxes, and insurance. The tenant pays you rent, and that money pays off these items, known collectively as PITI (Principal, Interest, Taxes, and Insurance). Whatever is left over goes into your pocket……that is cash flow.

2. Depreciation

Though many people buy rental property for cash flow, the real benefits that will build your net worth lie elsewhere. The second main benefit of buying rental property is the tax shelter that it creates for you. The IRS allows you to depreciate investment property over 27.5 years. In other words, you can take this depreciation expense against your active income from your job.
For example:Let’s say that you buy a $100,000 rental property. The IRS lets you depreciate the building, not the land. Generally speaking, 85% of the purchase price is used to determine the building’s value. In this example, the IRS lets you depreciate $85,000 (the house) over 27.5 years. This is equal to $3,090 per year that you can take as a depreciation expense against your active income. If you make $80,000 in income from your job, you can subtract this $3,090, which gives you $76,910. This is the income that you pay tax on, $76,910, not $80,000 (which you actually made.) You can see how by buying this one rental property, you have reduced your taxable income significantly. If you buy two houses of the same value, this number doubles, three, triples, etc.

We hope you’re having a great week and appreciate your support.

Tags: cash flow, cashflow, charlotte, depreciation, mike knight, real estate investing

This entry was posted on Sunday, August 17th, 2008 at 12:54 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.