The 5 Critical Components of Real Estate Investing Return

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.

The Buy, Rent & Hold Strategy of Real Estate Investing

Before I get into the list, I want to establish upfront that you should generally approach real estate investing with a “buy, rent & hold” strategy: buy it, then rent it out, and hold onto it as an investment. That's not to say that you have to hold onto it forever, but “betting on excessive appreciation” is not a long-term strategy.

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

When it comes to my own real estate investment returns, I try my best to forecast the probability of meeting or beating that hopeful public markets return of 7-10% CAGR, mentioned above. Also, since real estate can take up more of my personal time and effort than public markets investing, it makes sense to factor that in as well.

Cash Flow

The 5 Critical Components of Real Estate Investing Return

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.

Principal Paydown

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.

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