5 SOURCES OF REAL ESTATE WEALTH
Rental income plus tax refund from depreciation less expenses = Cash Flow before Taxes. With our current New Braunfels / San Antonio duplexes and homes, the high ratio of rent To sales price provides a positive cash flow in most cases.
You will deduct depreciation on your tax return each year giving you cash free Reduction in your taxes. Depreciation is computed as approximately 3.25% of purchase price over 27.5 years. (Your tax preparer may use other methods to give you a greater deduction.) You can also deduct 100% of interest, taxes, HOA dues, maintenance and fees. Consult your tax preparer.
In the New Braunfels and San Antonio Metro area, we have had an increase in value of approximately 4.4% per year in the median price of duplexes and homes. Starting at $63,000 (January 1990) to $178,800 (June 2013) – a period of 23 1/2 years. This shows a stable long term increase in value and a substantial increase in equity over 5, 10 and 15 years. (see Texas A&M real estate website: www.recenter.tamu.edu/data/hs/hs460.asp)
Each month your tenants make rent payments to cover the mortgage payment that reduces the amount of the principal loan. Over time the principal reduction becomes a significant amount of equity in your property.
On the sale or tax free reinvestment of your property, your gross equity will be returned in three ways:
a. Appreciation – increase in value over time (See #3 above)
b. Return of your original down payment
c. Principal reduction (See #4 above)
Your renters are paying off your mortgage, paying your taxes, insurance and expenses & giving you an up-front positive cash flow.