Real Estate Profit Sources
You can profit from real estate in five primary ways:
1. Positive cash flow. When you buy and hold a property for cash flow, take your total income and subtract all of your expenses. If you have money left over, that’s positive cash flow, and you have made a profit.
2. Appreciation. You profit when your property increases in value, even though you do not actually receive the cash until you sell. There are two types of real property appreciation: natural, which is the amount the market goes up and forced, which is adding value with improvements or a change of use.
3. Equity buildup. As the principal balance of your mortgage is reduced, your equity in the property increases. If the property is rented and you are using the rental income to make the mortgage payments and reduce the principal balance, you can consider the equity you gain part of your profit.
4. Tax reduction. Owning investment property entitles you to use a number of tax reduction strategies, including deductions for depreciation, interest, maintenance, and other expenses related to the management of the property.
5. Financing. If you hold all or part of the mortgage on property you sell, you can profit from the interest on the loan.