Real Estate Return Components

Real estate investing is a big piece of my financial pie. 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.

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)— which I discuss in my Big Picture of Investing post.

What You Need to Know About the Compound Annual Growth Rate

I want to get a crystal clear picture of whether or not they are making money, and if they're beating that 7-10% CAGR benchmark. I have a method by which I do this in Quicken, which I will eventually share with you in more detail in an online course, but for now, I'll try to keep it concise.

The 5 Critical Components of Real Estate Investing Return

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. Hopefully, this will be positive, but sometimes it can be negative if a big expense comes up. It also is determined by the stats of the property you bought.

Principal Paydown (Amortization)

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. While this money doesn't hit your actual bank account until a sale or refi, it is in fact income, to be realized down the road.


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.

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