Real Estate Investing Foundations

The foundations of real estate are Cash Flow, Appreciation, Depreciation and paying down debt. It is just a matter of finding the right deal so that you can benefit from these foundations.

Cash Flow

In the real estate rental business, cash flow is the income left after paying out expenses such as the mortgage, taxes, insurance, vacancies, repairs, capital expenditures, utilities, and any other expenses that affect the property. Cash flow can mean different things to different people. But at it’s core, its the money you make on the property after the expenses are paid.

When evaluating deals pay careful attention to the formulas used by sellers and partners to make sure that the property actually cash flows and if it does, how much. As a general rule, I only buy properties that cash flow, but there are some investors that look at property appreciation as the big money and buy for that purpose. If you are looking for a more detailed description of cash flow, check out Rich Dad Poor Dad and the game Cash Flow. We wrote a review of Rich Dad Poor Dad that can be read here.

Appreciation

In real estate, the term appreciation refers to the increase in the value of a property over time. From a macro level, appreciation may result from inflation, increased job opportunities in your market, and overall development in your town. This is very valuable to a real estate investor when coupled with cash flow it really makes the investment a winner or a loser.  

Depreciation

Many consider depreciation the biggest perk of real estate investing. Depreciation is the process used to deduct the costs of buying and improving a rental property. Rather than taking one large deduction in the year you buy (or improve) the property, depreciation distributes the deduction across the useful life of the property. You can begin taking depreciation deductions as soon as you place the property in service or when it’s ready and available to use as a rental. Depreciation can be a valuable tool if you invest in rental properties, because it allows you to spread out the cost of buying the property over decades, thereby reducing each year’s tax bill. Of course, if you depreciate property and then sell it for more than its depreciated value, you’ll owe tax on that gain. 

Debt Pay Down

This may be the simplest of all of the benefits of real estate investing, but it is my absolute favorite. You get to just sit back and have someone else pay your debt. As long as the property cash flows, the debt is being paid down by your tenants.

The Foundations

If you can understand these foundations and properly apply them to your investments, you should be successful. Be sure to check out our other real estate related articles here.

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