For landlords, cash flow is a prime concern. What’s more, some or all of any income might be tax-free. Non-cash deductions, such as depreciation, can reduce your taxable income below your cash income, leaving you with untaxed cash.
Suppose, for example, you buy a house for $200,000, which you rent to tenants. In Year One, your net operating income (NOI) is $16,000. That is, your rental income exceeds all your operating expenses (maintenance, insurance, property tax) by $16,000.
Also suppose that when you bought the house, you took out a $160,000, 7 percent, interest-only mortgage. Thus, your interest payments are $11,200: 7 percent of $160,000. You’ll wind up with $4,800 in cash: $16,000 in NOI minus the $11,200 paid in interest.
On your $40,000 down payment, $4,800 in cash would be a 12 percent return, in terms of cash flow. Although such returns certainly are not guaranteed, they are possible with a well-chosen real estate investment.
