So you have been researching rental property and you are drowning in numbers. Cap rates? Cash on cash? Internal Rates of Return? Good grief. What you need to know is that rental property makes money four different ways.
- Cash Flow Before Taxes
- Principal Reduction
- Tax Savings
- Appreciation
These four ways of making money with investment property are all intricately related. For instance, the more cash flow the cash real estate investor goes for the more likely he’ll have little to any appreciation as compared to surrounding areas. Likewise, the more appreciation a long term buy and hold investor goes for the less cash flow he’s like to accumulate (without a significant down payment) because these properties are usually in the nicer areas around town.
Sure, there are exceptions to the rule. But what you need to decide as new investor (or experienced trying to re-start) is what the end goal is before beginning.
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