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 

[Zachary Inman]

The primary point of using the banks money is to amplify your purchasing power. Doing so, and using the cash flow from the property to pay down the mortgage, allows your to build equity in the home which will increase your buying power over time. 

[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.

[Robert Wood]

Thanks man yea I’m starting to notice how important having tax Knowledge is 

[Joel Case]

Quote from @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.

 Thanks for this post Marco, I hadn't gotten this far into my learning/reading and it really helped me understand why paying off my homes ASAP may not be the best option. 

[Robert Wood]

He did explain that well 

[Jamie Bateman]

Another benefit to having a loan is you have less equity for any potential money-hungry, lawsuit-happy counterparties. Also, with inflation where it is, it makes even more sense to be a borrower in many circumstances. 

[Martin M.]

@Robert Wood

The more that you borrow, the less of your own money is tied up in that property, which means... you can use your own money as down payments to purchase additional investments. That's an oversimplified answer but you get the idea.