Want to Make Money in Real Estate? Understand Returns
Most people purchase real estate in hopes of earning wealth from their purchase, just as they would with any other investment asset. However, real estate is unique in that it has four distinct components of investment return. Essentially, here are the four ways you can make money as a result of real estate ownership:
- appreciation in value
- cash flows
- income tax benefits
- mortgage principal pay down
It’s important to note that just because there are several components of returns, that does not mean you will earn money on real estate investments. Many people lose money due to insufficient research and analysis, as well as through unmitigated risk issues. Do your homework before investing in real estate.
Appreciation in value
Most people buy investment properties with the thought that “it will appreciate in value and I’ll get rich.” If the past six years have taught us anything, it is that real estate doesn’t always go up on value. However, over long periods of time, say 15 to 25 years, real estate seems to perform well and has earned much wealth for many long-term holders.
Be aware, though, that appreciation does not pay the bills. It is better to invest based on cash flows, the next noted component of returns.
Cash flow positive
Most real estate investors do not understand how to pencil out their real estate deal. What this means is putting conservative estimates of rents and expenses down on paper and making sure that the rents, less all the expenses, leave the owner some cash in the bank. We call these “cash flow positive” properties.