Discover 5 Ways Real Estate Pays a Return
Yes, cash flow is the reason and most tangible return investors seek. However, the four other ways in which real estate provides a return is the reason why property investing is such an excellent investment for long-term wealth building that no other investment product can touch.
1. Cash Flow
This is the most tangible return on property investment and for most, the number one reason why people start investing. It’s also the most important of the five ways in which real estate provides a return.
Our Turnkey Properties are designed for sustainable cash flow by positioning them for success on the front end through our renovation process; and when the property is cash flowing, all four of the other ways in which real estate pays a return are maximized.
To figure out the return on cash flow, simply take the net number you profit in a given year and divide that by the total out-of-pocket cost to acquire your property. On your tax return, this will be your gross profit before your CPA starts applying the tax benefits of real estate.
You purchase a property for $125,000. Since we invest in linear, cash flow stable markets, a safe number to budget each year is 3%.
After five years, that $125,000 home is now worth $145,000.
3. Loan Paydown
Unlike our primary residence, where you pay down the mortgage, on an investment property, your resident each month is making a principal reduction of your mortgage through your rental payment.
The longer you hold the loan, the larger the principal reduction your resident will be paying.
4. Tax Benefit
While cash flow is fantastic and necessary, the tax benefit is equally as great because it allows you to keep more of what you earned. Such tax deductions would be the mortgage interest deduction, zero capital gains with a 1031 Exchange and our absolute favorite, real estate deprecation.
Also, by owning real estate, you are now a business owner. This can create further tax deductions such as traveling to real estate education classes, travel expenses incurred to the market where you own investment property, and home office space.
5. Hedge against Inflation
When a property appreciates, it lowers the loan-to-value of mortgage debt. As your equity increases, your fixed-rate mortgage remains the same.
In real estate, during times of inflation, rents go up. With that fixed rate, your cash-on-cash return increases. IRAs, 401(k) plans, and savings returns have to keep up with the inflation rate.
If an IRA or 401(k) returns 7%, but inflation is 3%, upon tax withdrawal, that investment return is barely breaking even after paying taxes. Since those types of investments only pay one return (cash on cash), they must provide a return year in and year out well above the inflation.