Calculating your Return on Real Estate Investments

Real estate investment offers numerous ways in which you can obtain a return on your investment.  Cash flow from rents, appreciation of the property value, and depreciation for tax purposes should all be included in determining your return on investment from real estate.

Cash flow from rents is probably the most well known way to make money on your real estate investment.  Each month you receive rent from your tenants that is, hopefully, more than your current mortgage, taxes, and insurance on the property.  If so, your profit is monthly cash flow to your pocket and is one of the returns you obtain from your investment in real estate.

Appreciation in property value through time, through improvements, or through both, can produce massive profits.  For example, if you purchase a property for $100,000 and sell it years later for $150,000, not only did you profit $50,000, but the rents you received during those years have put constant cash into your pocket. 

Appreciation can happen quickly with improvements.  This is the driving force behind house flipping.  Purchasing a distressed property at a significant discount and then fixing it up and remodeling it to sell at current market value (while keeping the improvement costs low in order to turn a profit) can result in sensational gains in a very short period of time.  Although it is true that you can rent out a flip, generally these houses are bought, restored, and sold in a relatively short period of time.  As such, you may not get much or any rental income out of a flip.

Tax breaks and other tax benefits need to be taken into consideration when calculating your return on investment in real estate.  Many people do not consider tax ramifications when investing in real estate.  Although taxes take money from you, there are tax breaks that you can utilize from real estate to enable you to keep more of your money in your pocket.  For example, you are allowed to depreciate an investment property for tax purposes.  Although the property may actually be appreciating in value, there are depreciation schedules established by the IRS to help taxpayers take advantage of these tax breaks. 

Return on investment in real estate goes well beyond simple monthly profits from rents.  The rents, appreciation, and tax ramifications need to be considered when calculating the return on investment from real estate.  By considering all of these, you will be able to get a true picture of the return on your investment from real estate.