In real estate, most people typically consider the same two factors when thinking about their return on investment.
First, you have the property’s appreciation, which is the money that you make over time while the property is gaining value. Second, there’s the property’s cash flow, which is the amount of rental income left over each month after paying for your expenses (think mortgage, taxes, insurance, condo fees, maintenance, etc.).
But there’s also a second part that most people don’t consider when they’re looking at an initial real estate investment.
If you’ve rented out a property, you know that the tenant is paying you rent every month. You also know that you have a mortgage to pay. However, the “hidden factor” that people rarely think about is the capital pay-down.
What does that mean? Well, your mortgage is two-tiered. There is the capital portion and the interest portion. They usually start off at about 50-50, in relative amounts.
Then, as you pay off more and more of your mortgage, you’re going to be paying down more capital and less interest. So, the three parts to calculating your real estate return are: the appreciation, the cash flow, and the capital pay-down.
When people ask, “How much money am I going to be making? What’s my ROI?” We ask them which factors they’re considering, because every investor has a different way of looking
at things. Some people care about cash flow, some people only care about appreciation, and vice-versa.
What is the most important part of a real estate investment, in your opinion? Which one speaks to you the most? Drop your answer in the comments or reach out to our team – we’re always happy to chat about investing!