John D Ambrogio

So, now that we know about cash flow and depreciation in Chicago luxury investment property - what about capital repayment and appreciation?  Everyone knows the latter (isn’t that why we’re in this current crisis?)  But many people forget the obvious advantages of the former!  Back to our earlier post about $3000/mo. PITI and a $5000/month in rental income - let’s forget for a moment about the obvious profit (and tax liability) there.  Let’s remember the REAL point - Someone else is paying your PITI (principal, interest, taxes and insurance)!  Obviously you have a down payment being tied up and not earning (or losing) money in equities or other investments, but the money in / money out is being taken care of by your tenant.  So while they’re not gaining any equity - you are.  There are thousands of amortization tables out there (try this). It may only be a few thousand dollars in the early years (interest is always somewhat front end loaded) but in the course of thirty years - guess what - someone paid off your investment property! And each year you’re receiving the same (or presumable more) rent off the property.  So in a simplified world - If you hold this property for thirty years charging $5,000/mo in rent at the end of thirty years you’ll have no mortgage and a cash flow of something in the arena of $60,000 annual income on the property.  And you never (hopefully) went “out of pocket” to pay it down.

Now it won’t be that simple of course, but capital repayment is probably the most overlooked of the ways to grow wealth in luxury real estate investment.  The final way, appreciation, is self explanatory, except for one thing that everyone has forgotten - the antonym: depreciation.  The good news, however, is that over a long term hold period you are historically (almost) guaranteed some appreciation.  Just don’t bank on it the way everyone has in the past.  Look at the four factors, invest wisely, and someday you can kick that tenant out of that luxury rental and move in yourself - rent free!

“But you must pay the rent”

John D Ambrogio

As mentioned in an earlier post - There are four factors to growing rich with investment property - positive cash flow; tax breaks; capital repayment; and — appreciation.  Each of these can vary significantly year to year and each has a unique effect on the ultimate return on investment property.

Let’s say you buy a lovely goldcoast brownstone apartment on tree-lined Astor St.  You come up with a down-payment (these days upward of 30%+ if you’ll be using it exclusively as a rental).  You then get a mortgage (with a little luck), find a renter and start to collect your rent.

So your mortgage payment of PITI (principal, interest, taxes and insurance) is $3000/month.  And let’s say you rent the place for $5000/month.  With your $2000/month “profit” you earn $22,000/year on your rental property.  Kind of.  That’s assuming you do all the management, advertising, toilet plunging, etc. by yourself and have no outside costs - but that’s another post altogether. But if you have a lucky year (and your tenant always pays you) you make a tidy profit.  In the course of ten years you’ve earned $220,000 and are well on your way to success.  But what about taxes?

Fortunately you have depreciation and other tax benefits that also help you grow  when investing in luxury real estate.  For example you can take advantage of depreciation Our generous government let’s you take a sliding rate of depreciation on the value of the property.  The IRS publishes guidelines each year - You can take a look at publication 946 - “How to Depreciate” .  In some of the early years that you own a property you can deduct up to 3.64% of its value  - which can be used against revenue you earned on property.

For example, if the fair market value is $500,000 for your rental property, you can depreciate it in certain years for 3.64%, or $18,200 (personal property depreciates a bit differently).  That means $18,200 out of the $22,000 you earned in rent is exempt from taxes - leaving you liable for taxes only on the $3800 difference.  You still earned $22,000 but can offset a significant portion of it!  That’s how some properties ”negative cash flow” while still putting money in the owner’s pocket year after year.  I simplify, of course.  That’s why the accountants are the ones who make the REAL money!

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