A very important concept in income producing real estate is the difference between traditional real estate, a single family home for example, and investment real estate. With a house, a buyer is paying market rates for the home, the dwelling, it stops there. With income properties, while the buyer is technically buying the property, what he or she is really buying the is income stream.
No, not a flowing body of water, a flowing body of cash. You see, to an investor, they are buying an asset for it’s ability to produce income. It is really that simple. Once purchased, that investor can expect returns to continue at the assumed rate, as well as profiting from the appreciation of the property itself. In order to measure the returns we can achieve from investment properties, we can look at four broad, basic types of returns. We will go into depth with these topics in a future post, but for now, here they are.
- Cash Flow – Ideally a positive number… cash flow is simply money in less money out.
- Growth in Value – As mentioned above, this return is based on the difference between the price paid at acquisition to the price at sale.
- Loan Amortization – The money for debt payments come from property revenue, but remember that as that debt is paid down (amortization), your equity share in the property is increasing.
- Tax Shelter – The tax advantages of real estate has commanded many books on that topic alone, but one key advantage in investment properties is the ability to reduce one’s taxable income with deduction related to property expenses.
Seeing investing this way is a big shift in mindset for some, but it is crucial to separate yourself from the “property buying” mindset and begin embracing the numbers. You are buying the income stream, accept it!