Here’s why cash flow doesn’t matter that much for rental properties.
Cash flow for investment properties doesn’t matter much. That may sound like a strange statement, but allow me to explain. Even if you buy a rental property that doesn’t have cash flow in the beginning, in the long term, it could be a great investment. Due to inflation, rent increases, so the cash will be flowing in a few years.
The crucial thing is to buy the right property in the right location so that it will double in value within 20 years. Since that’s the goal, cash flow doesn’t matter that much. As a result of tax deductions, the property will depreciate, and if you have negative cash flow, the IRS will treat your rental property as a business. If you’re losing money from your business, you can offset some of the other expenses through your regular job or other business.
For example, I’m a real estate professional, so every loss I experience from my personal real estate activities can be written off as an expense on my regular tax returns. That only works because I’m a real estate professional. The IRS considers anyone who spends at least 750 hours per year working with real estate to be a real estate professional—it doesn’t matter if you have a license or not. So if you’re a real estate agent and pay a lot of taxes because you’re self-employed, you must own rental properties because they’ll offset your regular income.
Ultimately, it doesn’t matter if you’re breaking even at the end of the month; at the end of the year, you may save $10,000 on taxes.
If you have any questions about cash flow or investing in real estate, please give me a call or send an email. I’d be glad to help.