Real Estate Investing Adventures

Four Ways You Make Money 

Before you actually purchase that investment property you have had your eye on, you need to have a well thought out plan on exactly how you will make your money on that investment. I have seen a number of first time investors get so enamored over actually making their first deal, that they don’t take the time to put together a well thought out plan for their investment.

There are four ways you make money with investment real estate:

1. Cashflow
2. Appreciation
3. Equity Growth
4. Tax Benefits

Your investment plan should recognize these “pots” of profit and maximize them.

Cashflow

Your investment plan should address how you will maximize your cashflow. You do this by either increasing your revenue or reducing your expenses or more likely a combination of both. On the revenue side can you increase your lease rate? Can you add leasable space or units? Can you lease some unused land or maybe a billboard? On the expense side, can you take over the property management yourself? Can you reduce utilities? Can you reduce your vacancy rate? Can you trim your maintenance costs?

Appreciation

You make money by market appreciation, in which you have no control. Cap rates will go up or down despite your actions. In addition, you make money by what I call “value-added” appreciation. These are investments where you have upside. For example, if you increase your NOI (Net Operating Income) by some of the suggestions above in Cashflow, then as long as the cap rate is the same as when you bought the investment you have an appreciation gain when you sell. Are you buying a building that includes an empty lot or parking lot that you can develop? Can you significantly increase your lease rates and therefore your NOI by doing a major renovation? This is the area where you have the chance for significant upside.

Equity Growth

This equity growth comes from the pay down of your mortgage.

Tax Benefits

The tax benefit you usually think of is depreciation which is the paper loss for the wear and tear on your building and equipment. Other tax benefits include interest deductions, which effectively reduce your interest rate and deductions for business equipment and capital improvements. 

 Investment Plan

Your investment plan should address these four “pots” of money. And I don’t mean give them lip service. Spending real time figuring out exactly how you are going to actually make money on your investment is one of the most important things you will do. You will only do so many deals in your investing career. Maximizing the profit out of each one should be one of your highest priorities.

Now for the bad news. No matter how well you plan, something will go wrong. That’s just life. In a future post, I will discuss how to do a proper risk analysis and develop contingency and mitigation plans for these risks to minimize the impact when the inevitable does happen.