Fundamentals of Investing in Portland Real Estate
Simply put, rents and other revenue less expenses and mortgage payments. When rents increase more than expenses increase, cash flow improves.
Loan Principal Reduction
Part of every mortgage payment pays down the mortgage. After ten years the balance on a twenty year loan will be about 60% of the original amount, and about 80% after ten years on a thirty year loan.
Income Tax Savings
The Internal Revenue Code allows you to deduct a portion of the improvement cost every year. Residential real estate is depreciated over 27.5 years (interesting history about where that number came from), so the annual depreciation deduction is about 3.636% of the building’s cost. A million dollar property with land valued at 30% and building valued at 70% would generate over $25,000 per year in non-cash depreciation deductions. That neutralizes the tax impact of positive cash flow, and may even create a tax loss at the same time you experience an economic gain.
U.S. residential real estate has appreciated about 4% per year on average for over 125 years. Compounded annually, that results in a 48% gain in ten years. Here is the trick: the appreciation applies to the property as a whole. The return due to appreciation on your invested cash (your downpayment) is four or five times that amount.