As a real estate investor you can make money with four basic returns:
1. Cash Flow
3. Loan amortization
4. Tax shelter
Properties are unique and each will provide returns on different scales. One property might give a good annual cash flow while another will appreciate and give you the big return when you sell.
1. CASH FLOW - This is how much money the property give you every month. Cash flow math is simple: Cash in - cash out = Cash Flow. Cash in comes from rents and other income producing areas in the building, such as a laundry, rental storage etc.
Cash out are the expenses in Mortgage payments, Real Estate Taxes, Property insurance, Maintenance, Repairs, etc.
2. APPRECIATION - This is how much the house increases in value: Future Resale Price less Original Purchase Price = Appreciation
3. LOAN AMORTIZATION - Using a loan to pay for an investment property is like having someone else pay your bills. Of course a loan requires payments, but this will come from the cash in flows from the rents, is like having your tenants helping you pay for the property. Debt Service or total Mortgage payment less interest paid = Amortization.
4. TAX SHELTER - An income property investment can shelter some of its own income from taxation and in some cases shelter income received from other investment sources. Some of the taxes that you can deduct from an income property are mortgage interest. The second source of tax shelter is through the depreciation deduction now called cost recovery. What this is that even if the property is probably increasing in value over time, the assumption is that the building (not the land) are wearing out and becoming less valuable so you can make a deduction on its value.
There are many factors involved when investing in real estate and like many other things in life there is the right way of doing it and a wrong way of doing it. When investing in real estate is important to buy at the right price at the right time and find ways to enhance the value of what you own.
(Note: tax information should always be consulted with a CPA or tax expert )