So there’s two main ways to make money from rentals, and one backup method that can be added to either one as flavor. They require slightly different business models to achieve, although they can always be combined. However, it’s important when getting involved in investment property that you design a long-term strategy and stick with it.
To get a good idea of what I mean here, I want you to take a minute and think about cows. There’s three reasons why you could keep a cow. One is as a milk source – keep the cow alive and keep milking it for as long as you can. It’s a long lifespan with a decent but not bountiful reward. Another is as a beef source – fatten it up and then eat it. This is a short lifespan but, if you’ll pardon the pun, a more meaty payoff at the end. Or you could keep cows because livestock owners get some pretty sweet government tax incentives for working in agriculture.
As a landlord starting out you’re faced with a similar choice. One goal is high cash flow – that is, consistent income that exceeds your expenses on a regular basis. This is your milk cow. Another focuses on rapidly building equity in the property and recouping the money when you sell it. This is like your beef cow. A third is using the property as a tax shelter and saving money by deducting losses & depreciation from your income tax returns.