Why does anyone buy real estate for investment purposes anyway? Whether you are a seasoned investor or a beginner everyone should have the same four benefits of investing on their minds. The four benefits include CASH FLOW, TAX SAVINGS, PRINCIPLE REDUCTION and APPRECIATION. You as the investor can only make the decision on what your business model will be if you are or want to be an investor in real estate. For many the bottom line is money! Making real estate money works two ways:
Income Assets
- Expenses - Liabilities
How do you analyze the four benefits?
#1 CASH FLOW
Potential Gross Income (PGI)
Less – Vacancy and Credit Losses
Equals Effective Gross Income (EGI)
Less – Operating Expenses (OPEX)
Equals Net Operating Income (NOI)
Less – Debt Service (DS)
Equals Cash Flow Before Taxes (CFBT)
#2 TAX SAVINGS
Net Operating Income (NOI)
Less – Interest
Less – Depreciation
Equals Taxable Income
Multiply by your tax bracket
Equals Taxes Saved
#3 PRINCIPLE REDUCTION
Annual Debt Service
Less – Interest
Equals Principal Reduction
#4 APPRECIATION
Initial Property Value
Times Annual Appreciation Estimate
Total the four benefits together and divide by the amount of money invested and you get your total return on investment as a percentage yield.