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Clearly a major reason that many people invest in real estate is for the healthy total returns (which include ongoing profits and the appreciation of the property). Real estate generates robust long-term returns because, like stocks and small business, it’s an ownership investment. By that, it means that real estate is an asset that has the ability to produce income and profits.

Compared with most other investments, good real estate can excel at producing current income for property owners. So in addition to the longer-term appreciation potential, you can also earn income year in and year out. Real estate is a true growth and income investment. The appreciation of your properties compounds tax-deferred during your years of ownership. You don’t pay tax on this profit until you sell your property - and even then you can roll over your gain into another investment property and avoid paying taxes.

If you have property that you rent out, you have money coming in every month in the form of rents. Some properties, particularly larger multi-unit complexes, may have some additional sources, such as from coin operated washers and dryers. When you own investment real estate, you should also expect to incur expenses that include your mortgage payment, property taxes, insurance, and maintenance. It’s the interaction of the revenues coming in and the expenses going out that will tell you whether you realize positive operating profit each month.

For income tax purposes, you also get to claim an expense that isn’t really an out-of-pocket cost - depreciation. Depreciation enables you to reduce your current income tax bill and hence increase your cash flow from a property.

Unless you make a large down payment, your monthly operating profit may be small or nonexistent in the early years of rental property ownership. During soft periods in the local economy, rents may rise more slowly than your expenses (rents may even fall). That’s why you must ensure that you can weather financially tough times. In the worst cases, we’ve seen rental property owners lose both their investment property and their homes. Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than the rate of increase for your property’s overall expenses.