Most investors know that real estate creates wealth, and sometimes often significantly. But today we are going to discuss the four actual ways that real estate creates wealth for the investor.
The first wealth generator from real estate is cash flow. Cash flow, or more specifically net cash flow after debt service, is the cash flow from operations that is left when all revenues have been collected and all operating expenses have been paid, and all debt service has been made. Whatever's left over, the net cash flow to the investor is the first generator of wealth.
The second wealth generator from real estate is appreciation. Appreciation is the amount that the asset has gone up in value, which is determined by, of course, the sale price minus the original purchase price. Appreciation can be significant in many cases, and is often the greatest driver of wealth out of the four.
Principal Pay Down
The third generator of wealth in real estate is principal pay down from leverage. Principal pay down is when the loan that is used by the borrower to acquire the real estate balance is paid down by the cash flow from operations. Effectively, the investor receives more money
at the beginning, than they owe at the end. And the difference contributes to the investor's wealth.
Finally, the fourth generator of wealth in real estate, which can be quite significant, are the tax benefits. Deductions for interest expense, non-cash expenses such as depreciation and amortization can be extremely beneficial; especially to investors who are looking for ways
to offset other income. When all four of these wealth generators from real estate are combined, it's not uncommon to see internal rates of return well over 20-30% in real estate.
We can help you build wealth through real estate investing. Contact us today for a free portfolio analysis on your existing commercial real estate investments, or a loan quote if you're looking to purchase or refinance a commercial real estate property.