Since placing capital in real property with the expectation of generating a return is the hallmark of real estate investing, in this article, we want to discuss the returns an individual investor can expect to receive from both monetary and nonmonetary sources associated with owning investment real estate.
These are benefits that can be directly measured by costs or returns of that component. In other words, how much money (in dollars and cents) can be made by owing the rental property?
- Income – Rental income that remains after operating expenses, debt service, and taxes is cash flow that becomes your income. There are many factors that influence the rental income you might receive over time such as the competition in the market, or a change in the market that dramatically alters the market and causes a wide disparity between what renters in the past are now willing to pay at this point, so there are no guarantees. Still, when cash-in survives and exceeds cash-out, it’s money in your pocket.
- Appreciation – This results in what may be categorized as real or nominal increases in value of the property. Nominal increases in value mean a property has increased in absolute dollar terms. Real increases in value occur if an asset increases in value at a rate that exceeds the appropriate measure of inflation in the economy or market basket that is being used as a measure of purchasing power. Appreciation may be realized through either the sale, other disposition of the asset, or by borrowing against the increased value of the asset.
- Financial leverage – This monetary return results in making money by using borrowed funds (other people’s money) that cost less than the return they enable, thus resulting in magnifying the rate of return on investor equity and simultaneously enabling the investor to control a much larger investment than would be possible without borrowed resources.
These are benefits that are less obvious but can be measured by personal investment objectives and opportunity costs associated with the particular benefit.
- Pride of ownership – Direct ownership and control of an investment in real estate enables one the opportunity to control one’s destiny through managing and making one’s own decisions about that investment.
- Security – There is a measure of security knowing that an investment is under the investor’s control. Controlling the ownership of land and improvements at a specific location to insure uninterrupted tenure at the same address for a business, for instance, or as in estate building, financial security upon retirement.
- Diversification – In this case, an investor may purchase real estate as an investment for portfolio diversification in order to spread risk by having a diversity of investments among different investment types.
- Tax shelter – Finally, it should be noted that most real estate investments involve tax shelter advantages arising from opportunities to defer tax on income through depreciation and a variety of tax credits.
Those who are interested in maximizing their wealth build fortunes by real estate acquisition, development, and management (real estate investments are a source of wealth). But as you can see, there are returns from both monetary and nonmonetary sources. And both benefits, after all, do play a role in selection of real estate as an investment.