To become a good real estate entrepreneur, you should have several good worksheets to help calculate the expected return on your investment (ROI). Real estate investing has many advantages and to be successful you need to understand the numbers and how to project the cash flow and profit for your property.
Here are several factors that contribute to your ROI:
Purchase price of your property - Fair Market Value
Fair value of rent in your area
Turnover and vacancy rate
Expected cost of repairs and maintenance
Expected cost of insurance, utilities, real estate tax and interest payments
Projected tax deductions and net tax due on your profits
As you make your investment decision, you want to make sure that you understand the difference between your cash flow and the taxable rental profit. Cash flow is the difference between the money that comes in from rent and the money going out for your mortgage payments, insurance, real estate taxes, utilities, repairs, and other expenses such as professional fees, travel and property management fees.
Net taxable profit is a different calculation. Your mortgage payment is not a tax deduction. You can deduct the interest portion of your payment and taxes and insurance, but the principal payments are not deductible. However, you do get to deduct depreciation. Depreciation rates vary depending on if your property is a residential or commercial property. You can also deduct other types of non-cash deductions available to landlords including home office and the standard mileage rate for business auto usage.
You will most likely report income on your rentals on Schedule E on your tax return or Form 8825 on Form 1065.
It is important to update your financial reports regularly and keep good records of the expenses by property. We recommend using software such as Landlord Studio to easily track your income and expenses. This specialized software has many other resources for Landlords including tips on how to screen tenants and easily collect monthly rent.
Property investing is not a passive activity. You’ll need to understand your state’s tenant laws, find easy ways to collect rent, and find a good handyman or learn how to fix things. Even if you hire a property management company, you will need to be involved in the decisions about your property to make sure that you are making the best return on your money. If you are willing to put in the effort to make it succeed, real estate investing can have great payoffs and provide really nice retirement income or help you to build a lifestyle of freedom ahead of traditional retirement.
Comments