In this article, I want to discuss briefly the four basic ways that real estate investors make money with on their investment with rental properties.
1. Cash Flow
2. Appreciation
3. Loan Amortization
4. Tax Shelter
In a word, cash flow is the amount of cash coming into a rental property less the cash that goes out; appreciation is the property’s growth in value over time; loan amortization is principal reduction of the mortgage over time; and tax shelter concerns deductions allowable by the tax code such as mortgage interest and depreciation.
These four benefits may not be present in equal measure with every rental property, but rental properties generally constitute some blend of the four benefits with some stronger and some lesser.
Whereas one rental property, for example, might give you a good annual cash flow it might offer you little appreciable value and return when you the sell the property. Another property might yield little annual cash flow due to continual updating and repairs but in the end give you a fantastic payday when you sell. And some rental properties might simply offer you a good tax write off, with neither the benefit of either cash flow or appreciation.
You get the idea. Whereas cash flow, appreciation, loan amortization, and tax shelter comprise the complete pool of potential benefits associated with owning real estate investment property, it is highly unlikely that real estate investors will obtain all four benefits in one rental property alone.
Okay, so which benefit is the most important? That depends on your investment goals, and what it is you hope to accomplish by investing in real estate. Just be sure to create a thorough real estate analysis on each rental property you are considering and make your investment decision based on the results you deem most important.
Here’s to your real estate investing success.
