Net positive cash flow from a rental property is the equivalent to the Holy Grail for landlords; it may seem mythical or even impossible to some would be investors, but what makes positive cash flow attainable are the tax breaks given to rental property investors.
The concept of owning a rental property is pretty simple in theory, you buy a property, and over the course of a few years the asset increases in value, while your tenant essentially pays the mortgage and lowers the loan amount. This creates a scenario where the gap between the home price and the note amount, or your equity, is continually increasing.
The one major hurdle with this premise is that is difficult to find a property where the area rent for the home will cover the mortgage, insurance, taxes, and repairs up front. This is what keeps most people out of the real estate investment game, negative monthly cash flow.
The best way to negotiate negative cash flow is through knowledge of tax planning and tax deductions. Real estate investors are allowed to deduct mortgage interest, insurance, taxes, home repairs, depreciation expense and any utilities bills that are paid out of pocket. These expenses are netted against rental income, and the subsequent gain or loss is reported on Schedule E of your 1040.
By far, the most important tax deduction for real estate investors is depreciation of the building. You do not spend any capital to take this deduction, like you would for taxes or insurance, depreciation is only a loss on paper, but is fully deductible. For example, a home purchased for 200,000 dollars will generate a yearly depreciation expense between six and seven thousand dollars depending on the price of the land in that area.
Add the depreciation expense to the loss generated by rental property, (assuming you have negative monthly cash flow) and you arrive with your total tax deduction for the year. This deduction will reduce your taxable income, and your total tax bill, giving you the opportunity to greatly improve your net cash flow from the rental. The easiest way to determine your total tax relief is to multiply the tax deduction by your marginal tax rate, or the tax rate you pay on the last dollar you make.
Have your tax professional crunch the numbers for you in regards to a rental investment, and you will see it is very possible to turn a three or four hundred dollar a month loss, in to positive monthly cash flow.