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The 5 Critical Components of Real Estate Investing Return

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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.

As a rule, any investment property you buy needs to be relatively self-sustaining as a rental. This way, if you go through a rough patch in the market and the house loses value, you can hold onto it comfortably until its market value rebounds.

That said, even though you invest in it as a “buy, rent & hold,” if a period of significant appreciation powers up your return, you can sell and reevaluate what you want to do with that equity. That’s smart real estate investing in a nutshell. Easy, right?

What You Need to Know About the Compound Annual Growth Rate

Real estate is one potential piece of your asset allocation pie, so you should think about, and compare, its potential results against the same benchmark the finance industry compares its results: the 7-10% CAGR (compound annual growth rate)

The 5 Critical Components of Real Estate Investing Return

These five categories are combined to produce your net profit. Once you have that number, you can run it through a CAGR calculator, along with your initial out-of-pocket cash investment and the length of time you were in the property, and that will yield your CAGR for comparison.

1 Cash Flow 

(Cash on Cash)

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.

4 Tax Effect

Let’s look at some ways you will experience tax benefits.

5 Capital Expenditures (CapEx) & Renovation Cost

Wait, Don’t Forget the Refi!

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to read more about refinancing and real estate returns!

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