The Four Types Of Real Estate Investment Returns

The chief objective in assuming any type of investment is to acquire an eventual profit. There are many forms of investing, and investing is not relegated to the concept of money alone. Investments of time, effort, and intellectual capitol are all concepts that may be difficult to boil down into simple equations, but when it comes to making money in the real estate game, it’s ultimately about dollars and how many you're going to accumulate. In terms of real estate, the four types of investment returns are cash flow, appreciation, amortization, and tax sheltering. Cash flow and appreciation are the two on which your average beginner real estate investor will likely be focused, but you may be loosing out if you aren’t able to calculate the true costs and benefits of owning investment properties.

If you're getting into real estate, you're going to hear a lot about cash flow, and this is one of the key areas of focus for most long terms investors. Cash flow basically describes the net returns from an income generating property after all expenses have been paid out. You can have positive, negative, or neutral cash flow based on rents and net operating costs. So when you purchase rental property, potential cash flow is the thing you are really purchasing.With the four types of real estate investment returns, you may have one or two without the others, or you may even be willing to sacrifice one for a short period of time in order to guarantee profitable returns in another area. What is great about real estate investing is that you have the ability to truly strategize and be creative with how you wish to grow your investments.

Appreciation is pretty much common knowledge as well, and it can be alluring and deceptive to the young investor. Appreciation is basically the difference between initial purchase price and eventual sale price of a given piece of property. Speculation in the various real estate markets is what caused real estate appreciation rates to skyrocket during the end of the 1990's and early 2000's, and people irrationally expected this trend to continue into the foreseeable future. Typical appreciation usually fluctuates anywhere between 1 to 6 percent depending on the market in which you choose to invest.

The next two types of real estate investment returns are not always talked about because they are not as glamorous and not as easily apparent. Amortization is finance lingo for the process of paying down the principle of a loan balance. If you own or are planning to purchase investment property, ideally you want to be in a position to experience positive cash flow. When you have positive cash flow, the implication is that your tenants are paying your monthly mortgage for you. So the third type of return inherent in real estate investing is that you have amortization occurring on which you are hopefully not even having to pay.

The fourth type of return, and one in which every savvy investor seeks to maximize, is the fact that real estate is an excellent tax shelter. The two basic tax advantages of any real estate investment are the ability to deduct mortgage interest and the deduction for depreciation of the structure. The ability to deduct your mortgage interest is a sizeable tax advantage in itself, but the fact that your tenants are more than likely paying it for you shows how truly valuable it can be.

With depreciation, the government takes into account that while the value of your property may increase over time, the structure that sits on top of your property is actually wearing out and degrading. The government allows you to write this structure depreciation value as a loss and deduct that amount from your annual taxes. So for example, say you have a gross income from a given property of $75,000, and subtracting $26,000 for operating expenses you might think you’d be left with $49,000 in taxable income from the property. In actuality, when you subtract say $37,000 in mortgage interest and $9,000 in depreciation, you will be left with $3,000 in taxable income!

What's truly great about the tax advantages of real estate investing is not only does the individual investment provide cover for itself in the tax code, but you can also use it to shield your other investments from tax losses. Depreciation itself may even be large enough to shelter the income from the property itself and have some left over to cover income you receive from other investments.

By: Joel Henderson

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Joel Henderson is an avid writer and passionate about real estate investing. You can read more about real estate investing returns and other types of flipping property for profit at PropertyClimb.com.