The benefits of having a mortgage on a investment property

[Robert Wood]

My question is Bp teaches you to use bank’s money. One of the purposes is to get tax breaks but don’t you still have to claim the profit of the cash flow you do get after your mortgage and bills are paid 

[Marco Bario]

@Robert Wood -

You've dipped your toe into a very deep topic. Owning rental real estate provides:

Appreciation
Depreciation
Amortization
Income
Security

and more...

Let's say you place $50K down on a $200K property. You borrow $150K.

Starting out, you'll pay Schedule E income tax. Sched E income is taxed at a lower rate than ordinary (W2) income. The Schedule E form allows you to deduct expenses such as interest and operating expenses. Also, you'll have the opportunity to claim depreciation which further reduces the taxes you owe.

If you'd paid cash for the property, you'd generate more taxable income because there would be no interest deduction. This is the only tax difference while owning and operating the property.

The biggest advantage comes in the form of Cash on Cash return:

By using leverage (debt), you only invested $50K cash but may have earned $12K after interest and other expenses (excluding depreciation) in a given year. $12K/$50K = 24%. Your cash on cash return = 24%

If you paid cash and earned $18K after operating expenses (no interest), your cash on cash would only be 9% ($18K/$200,000K), and your taxes while operating the property would be a bit higher without the interest deduction.

As I said - deep topic and every situation is different. I like to learn as much as I can about the tax code. It makes me a better investor and there are times I can refer to it when working to acquire assets from others. I also rely on my tax advisor, and always recommend others do as well.