Real Estate Purchase

 

Cash Flow (before taxes)

Appreciation

Principal Reduction (Loan Amortization)

Tax Benefits / Depreciation

 

Cash Flow

  1. Cash Flow is King!!!
  2. Do you have a checkbook? Same concept - money comes in and money goes out
  3. Cash Flow is defined as the money left over after all the bills are paid (i.e. expenses, property taxes, insurance, utilities, maintenance, etc…)
  4. Called “Positive Cash Flow”
  5. This goes directly to the hip national bank
  6. If you have spent more than you took in, you had a “Negative Cash Flow”, which means you need to feed your property out of your own pocket each month

Appreciation

  1. Defined as the growth in value of a property over time
      1. Future sale price – Original purchase price = Appreciation
  2. Do you have a savings account? If you do you’ve seen appreciation at work
  3. Revenue generated from rents and other income drives the value of income property
  4. A real estate purchase is really buying a properties income stream (Net Operating Income). The greater the income stream, the greater the value of the property

Principal Reduction (Loan Amortization)

  1. Real estate is great because someone else pays the bills for your property (hopefully, if you bought right)
  2. With a loan comes monthly payments and how do we pay for that, our partner the renters (even though they do not have any ownership interest)
  3. Thank your tenants, they are basically buying your investment property
  4. Amortization: The reduction of a debt over time by making periodic payments (usually monthly) a portion of which is interest and a portion of which reduces the outstanding amount of the debt.

Depreciation

  1. Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age
  2. Depreciation makes real estate a favorable investment choice because it's also treated as an expense for tax purposes. While only an expense on paper (since the owner actually pays nothing for it), it can nonetheless offset or shelter other income from taxation. 

Overview

  1. Not every investment property will provide these returns in equal proportion
  2. Every investment property is different and may not have a direct benefit of all four
  3. The four returns make up the total of potential benefits, so NEVER just use one, two or even three to determine the investment opportunity. All Four should be considered when determining the Total ROI of a particular investment.