The 5 Critical Components of Real Estate Investing Returns

The way I think about real estate investing, in the same way, I think about public markets investing…I look at it within the context of our life goals, savings plan, and the hopeful expected return on our investments.

I'm going to give you a breakdown of The 5 Critical Components of Real Estate Investing Returns, so you can ensure the property you're looking at will meet your goals.

1. Cash Flow

Cash flow can be positive or negative and is basically the monthly financial net result of your property's general income (rent received) and expenses. You collect rents, and out of that you pay the PITI (principal, interest, taxes, insurance) on your loan

Every month as you cover your PITI, the “P” goes toward paying down your loan principal, so your principle balance is almost always going in the right direction…down.

2. Principal Paydown (Amortization)

3. Appreciation

Throughout the timeline of a property's ownership, its value in the open housing market may be going up or down. Like the stock market, the housing market has a long recorded history of performance.

The US government offers a host of tax advantages to owners of real estate. These advantages translate into potentially significant real money that will further line your pockets.

4. Tax Effect

5. Capital Expenditures (CapEx) & Renovation Costs

While also known as “capital improvements,” here's what it includes: the money you spend improving your property that is not part of the usual “expenses and maintenance” of cash flow.

In some sense, this is a subcategory of cash flow because it’s potentially “cash out of your pocket” at the time of doing it. But, because it's also voluntary, I don't count it there. I keep it in its own category and track it as such.

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