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Memphis Property Management Blog

Does Your Rental Property Make you Money?

HomeRiver Group Memphis - Thursday, March 19, 2020
Property Management Blog

One thing to understand is that there are 5 ways to make money in real estate, and not all of them have to do with cash flow. 

5 Ways to Make Money in Real Estate

1. Cash flow

It’s a common misconception that if your property is not cash flowing, you are not making any money. And if you’re not making any cash flow, you’re losing money. However, you have to understand, cash flow is only one piece of a 5 part equation. 

2. Equity

Next, you have equity capture. That’s when you buy the property for less than what it’s worth. Therefore, when you actually close on it, you’re capturing equity immediately.

3. Depreciation

You also have depreciation. If you are employed and you’re able to depreciate the property, you were able to get tax advantages for depreciating that asset.

4. Debt paydown

There’s also the debt paydown. If you’re using the property as a rental and have a tenant in place.  That tenant is paying down your debt every month. Eventually you will owe nothing on that property, and the tenant will have contributed to pay that down.

5. Appreciation

Finally, there’s appreciation. No matter what you do, properties are going to go up in value. Think back 30 years ago. If you could go back in time and buy a property—or 10 properties—where you grew up, you would be thinking a lot differently based on appreciation. You would not even really be concerned about the cash flow.

So if you think that your property is not making money, you want to be very careful. It may not be making you an immediate cash flow, but you have a tenant in the property paying down the debt. You are getting the tax advantages and you’re depreciating it. You are getting appreciation as it goes up in value. And if you purchased it correctly, you are getting some equity capture.

You may not be getting cash flow. But as you can see, this is not the end of the world. It’s not that your property isn’t making you any money, it’s the fact that one of the five pieces is not making you money. Most likely, it’s making you money other ways. 

Look at all the other variables. Look at the variables that you may have considered when looking into buying it in the first place.

Additionally, if you have maintenance on your property—let’s say you have to replace the air conditioning unit or the roof or the hot water heater—those are called capital improvements. That is going to improve the property. It’s not a loss. You’re actually making the property worth more money.

Think of all those factors before you determine that your property is not making money. If you do look at all those areas and still decide that it is not making you money, you can very simply sell the property.

There’s nothing that says that you have to hold onto a property just because you own it. There’s always an exit strategy. Sometimes the best exit strategy is just getting rid of it and taking that money and turning it into a better deal that will make you money.

And more importantly, the mental stress that you’ve got to deal with. Whenever you have a property that you’re upset about and it’s bothering you, it’s always in the back of your mind. If that’s happening to you, it’s not worth the additional stress.

Sell the property, take the money, roll it into a better deal. And now you’re able to buy something that is better energy for you, and you’ll feel a lot better than you currently do.

-Steve Rozenberg; Bigger Pockets