Top Ways Investors Benefit By Owning Real Estate Investment Property!
Few real estate investors (if any) would ever shell out money on a real estate investment unless it generates a favorable rate of return.
Placing capital in real property with the expectation of generating a return is the hallmark of real estate investing and it is simply smart for any individual investor to consider all the returns of owning investment real estate.
In this article, we want to discuss the returns a real estate investor can expect to receive from both monetary and non¬monetary sources associated with a real estate investment property (not the ownership of personal residences).
Both sources of which - though not necessarily a moneymaker in its own right - are returns to the real estate investor nonetheless.
Monetary sources of benefits include those that can be directly measured by costs or returns of that component. In other words, how much money (in dollars and cents) can be made by owing the rental property?
Rental income that remains after operating expenses, debt service, and taxes is cash flow that becomes your income.
Naturally, there are factors that might influence the rental income you receive over time such as the competition in the market, or a change in the market that dramatically alters the market and causes a wide disparity between what renters in the past are now willing to pay at this point; nonetheless, if your cash-in survives and exceeds your cash-out, it's money in your pocket.
This results in what may be categorized as real or nominal increases in value of the property.
- Nominal increases in value mean a property has increased in absolute dollar terms.
- Real increases in value occur if an asset increases in value at a rate that exceeds the appropriate measure of inflation in the economy or market basket that is being used as a measure of purchasing power.
Appreciation may be realized through either the sale, other disposition of the asset, or by borrowing against the increased value of the asset.
This monetary return is associated through use of borrowed funds.
Positive leverage results in making money by using borrowed funds (other people's money) that cost less than the return they enable, thus resulting in magnifying the rate of return on investor equity and simultaneously enabling the investor to control a much larger investment than would be possible without borrowed resources.
Non-monetary sources of benefits are less obvious but can be measured by personal real estate investment objectives and opportunity costs associated with the particular benefit.
Pride of Ownership
Direct ownership and control of a real estate investment enables one the opportunity to control one's destiny through managing and making one's own decisions about that investment. This may be lacking under a leasehold agreement for commercial real estate.
The knowledge that an investment is under the investor's control provides a measure of security. Controlling the ownership of land and improvements at a specific location to insure uninterrupted tenure at the same address for a business, for instance, may be vital to the survival, growth, and ultimate success of a business. Or it may be have to do with estate building in order to insure financial security upon retirement.
In this case, an investor may purchase real estate as an investment for portfolio diversification in order to spread risk by having a diversity of investments among different investment types.
Finally, it should be noted that most real estate investments involve tax shelter advantages arising from opportunities to defer tax on income through depreciation and a variety of tax credits.
About the Author
James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com
ProAPOD also provides iCalculator - an online real estate calculator that enables you to learn dozens of real estate definitions and formulas as you calculate. You save 64%. Learn more at real estate calculator
- How To Calculate Cash on Cash Return | The Method And Formula!
The method, formula and calculation for cash on cash return with insights in how to use it in your next real estate analysis.
- The Proforma Income Statement: How to Project Rental Property Cash Flows And Performance!
Why a proforma income statement is used for rental income property revenue projections. Learn how to construct one. Samples provided.
- Understanding Time Value of Money and How Real Estate Investors Gauge It
Time value of money explained and how real estate investors incorporate it into their analysis to measure rental property cash flows and rates of return.
- The Present Value of a Future Cash Flow - Why Understanding Present Value is Crucial To Any Real Est
Learn the difference between present value and future value and why these time value of money concepts are crucial to your cash flow analysis of investment real estate.