3 ways an income property makes you money
This article has been written to help familiarize you with the different ways an income property will generate you money. Benjamin Graham, in his book the intelligent investor, defined an investment as “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.”. Although he may not have agreed that real estate is a secure form of investment, it fits his definition quite nicely.
One of the major benefits of real estate investment over other forms of investment is that it allows you to put down a sum of money and borrow up to 5, 10 or even 20 times the amount of your down payment (I.E. 20% down will provide you with a mortgage allowance of 80% of the purchase price). In general, when you borrow money, you have to pay it back with interest and the beauty of owning income property is that the regular stream of income paid by the tenants in the form of rent, pays back the mortgage including the interest accrued on the loan.
Let’s have a closer look at the 3 ways income property can make you money.
Positive cash flow
This is the instant gratification of your investment, where you see your bank account grow month over month and validate that you made the right move investing in real estate.
In its simplest form, cash flow is the income received minus all of your expenses for the month.
Mortgage pay down
While you’re generating a positive cash flow, something else is happening – your tenants are paying down that money you borrowed to buy the building. That’s right, that’s additional money you are making month over month. Although you don’t have access to this money immediately, it’s setting you up for your next investment by creating an opportunity to finance your next project, say 5 years from now… that’s right, your next investment may not require you to put any of your own money down.
Increase in value
Speaking of financing your next project, when the time comes to borrow the money that has been paid down, odds are that your property will have increased in value, which will allow you to fund an even bigger project. There is no guarantee the price will increase, but remember, you’re in this for the long term (think 30-50 years or more, if you pass it down to your kids). As history has shown us, real estate prices always rebound and create new highs.
Because there are so many ways that real estate makes money, these three principles are my personal go-to strategies to build my wealth, and I apply these principles to all my projects. In all my years of real estate investing, I’ve only put my own money down on the first property I purchased. Since then, I’ve used the methods described above to finance all my subsequent projects.
What are some other ways you’ve discovered where investing in income real estate has made you money? Leave a comment below. I’d love to hear from you and get your thoughts.
