7 Profit Centres of Real Estate

When most people think of investing in real estate, they think of the obvious, appreciation.
The truth is however, that real estate can bring profits and financial benefits in 7 different ways.
This is the foundation of investing in real estate for profit. The first three profit centers are Cash Flow, Principal Reduction and Appreciation. They have been described by some investors as the appetizer, main course and dessert, respectively.

The other 4 profit centers: Equity Growth, Leverage, Re-investing your Equity, and Tax Advantages provide additional advantages and benefits, but are not always considered.

1. Cash Flow (Appetizer)

Cash flow is the net money left over from the rental income received from your investment property after paying all property taxes, operating and financing expenses. Cash flow is called the appetizer, as this refers to the generally modest return on the investment provided by the positive cash flow at the beginning of the investment – while the mortgage is being paid down.

2. Principal Reduction (Main Course)

Principal reduction refers to the portion of each mortgage payment that goes towards paying off the principal of the mortgage versus the interest charged on the mortgage loan. Principal reduction is referred as the main course – this is the part of a real estate investment that gives you the largest potential return from the operations of your investment.

3. Appreciation (Dessert)

Appreciation on your investment property is what is called dessert. It is the icing on your investment cake. While cash flow and principal reduction will enable you to achieve a decent gain on your thoughtfully managed investment property, appreciation should be considered the bonus.

4. Equity Growth

Equity = Asset value – Liabilities.

Beyond positive cash flow, equity is the element of real estate investment where you can realize most of the gain in your investment. The rate of equity growth is determined by two things, Uncontrolled Factors (market factors that you need to research, understand, and continue to be aware of) and Controlled Factors (that you can optimize by adding value).

5. Leverage

Financial Leverage is using other people’s money to buy an investment property. No other investment vehicle has this degree of leverage available. Unlike stocks, the banks will loan you most of the funds as a mortgage against the property itself without necessarily tying up your other assets as collateral.

6. Re-investing Your Equity

Real estate investing done well, results in equity growth in your investment property. As you pay down your mortgage by a significant amount, you can use that equity to refinance and re-invest in more properties, thus making your money working even harder for you.

7. Tax Benefits

There are several areas in real estate investing in which this profit center can be realized….accounting practices allow a percentage of capital cost allowance to compensate for the “depreciation” of your property per year. This allowance can be used as a tax write off(keep in mind that this allowance needs to be repaid upon sale of the property). The expenses you have associated with your investment property are also tax deductible, this includes the interest expense on your mortgage.

"Don't wait to invest in real estate; invest in real estate and wait"