don’t forget about depreciation. The tax code assumes buildings and improvements wear out over time. These losses are deductible from income, regardless of the property’s actual market value.
A positive after-tax cash flow can come from a negative pre-tax cash flow. Generally, the depreciation deduction makes up the difference. If you meet the eligibility test, you’ll be able to use the depreciation to shelter some of your taxable income and reduce your tax bill. Second, you’ll want to ensure your tenants make timely rent payments and take care of the property. Of course, a positive cash flow is impossible without income. A thorough credit, employment and landlord check of any potential tenants is a must and will help you track down the best renters.