Our favorite reason for investing in real estate is that there are so many aspects of asset growth within each property acquired. Here are the six sources of asset growth we see in real estate investment:
Every investor should typically acquire the asset they are looking to purchase at a price below it's current market value. This is not always possible, but certainly it is the goal of every investor.
Once a property is purchased, an investor may quickly add to the overall asset value by improving the condition of the property or adding an additional use, or by improving the income of the property. This process of improving or adding to the property increases equity or asset value.
The amount of cash that is still available each month after every expense and future expense is accounted for or net return from the property should always be expected or anticipated in an effort to maximize asset value and cash-on-hand to reinvest into additional investments.
Once the investor begins paying off the principal of the mortgage from the income of the property, the asset value begins to grow because there is less money owed on the original mortgage. Typical analysis of real estate will not include principal reduction as part of the net cash flow. Therefore, it needs to be viewed separately from cash flow in looking at total asset growth.
The IRS still allows for real estate depreciation, which is really not occurring on most real estate investments. This depreciation may lower tax liability for the real estate investor, but each investor must seek professional tax counsel to determine the affect of tax savings on their particular investment property.
The increase in value of real estate due to time, supply and demand is considered appreciation. This can substantially increase the value of real estate depending on the overall market conditions. While different market conditions can certainly affect real estate value, historically real estate continues to appreciate over extended periods of time.