The 7 Profit Centers Of Owning Real Estate
When most people think of investing in real estate, they think of the obvious, “appreciation”(the increase in value of the property over time).
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 profit center is EQUITY. Equity is defined as the fair market value minus the debt service (mortgage)
- The second profit center is LEVERAGE. This is the ability to buy more with less money.
- The third profit center is APPRECIATION. This is the increase of the value of the property over time (as mentioned above).
- The fourth profit center is PRINCIPAL REDUCTION. This is the reduction of mortgage owing over time through mortgage payments(paydown).
- The fifth is CASH FLOW. When the income you bring in from your property exceeds your expenses, you have a positive cashflow.
- A sixth profit center are TAX BENEFITS. There are several areas in real estate investing in which this profit center can be realized….accounting practices allow for 3-4% 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.
- The seventh profit center is REINVESTING YOUR EQUITY. By combining the profit centers of APPRECIATION, PRINCIPAL REDUCTION and EQUITY you will have additional “free” funds that the bank will lend to you, interest free, in which you can use another profit center, LEVERAGE in order to purchase another investment property!
As you can see, there are many ways in which you can benefit from investing in real estate.
If you are interested in finding out more about the profit centers that I outlined above I will be going more in depth with each profit center individually in further posts.
Join me to learn more!