ROI can be defined as Return on Investment, which with income property investment, is a multidimensional asset class. This means there are four primary pillars we'll need to examine in order to determine our ROI in respect to income property.
Return on Inflation
Jason Hartman has a second definition for ROI: Return on Inflation. This new ROI isn't necessarily determined by actual inflation, but by what Jason calls “inflation induced debt destruction”. What inflation does is devalue debt. It actually reduces loan balances. This can earn real estate investors significant amounts of wealth.
4 Pillars of Income Property
Because income property is a multidimensional asset class, there's more to it than the average investment. It's not as simple as trading commodities, buying low and selling high, or stocks. There's no sitting and hoping to get a dividend. Jason Hartman believes that there are roughly four dimensions to income property. Here they are:
- Cash Flow
- Principal Reductions
- Tax Benefits
With the right strategies, an investor can benefit from all of these.
Appreciation can be defined as the “buy low, sell high” principle. Leverage, defined as borrowing money to increase the potential return on
an investment, can actually amplify appreciation. Say an investor puts 10 percent down on
a property which goes up 1 percent each year. The gross return on said property will be
10 percent because of the 10:1 leverage ratio. While this is a simplistic example, there's power in leverage.
There's absolutely no doubt that positive cash flow is a good thing. There's also negative cash flow, but not to worry. Other aspects of income property investment, such as the multitude of tax benefits, can offset most negative gains.
Once you invest in a property, an obvious option is to rent it out. After you find a suitable tenant, you can begin receiving rent. Mortgage can be included in those rent costs. Essentially, this means the tenant will be paying down the mortgage for you. Eventually, you can end up with an asset someone else paid for. This is good debt.
Real estate investment is one of the most tax-favored assets in America. Tax breaks exist for almost every aspect of income property investment. The property even depreciates in value over time, which results in more tax benefits, with no money spent. This is detailed in our article “Get Tax Free Money from Income Property.” Stocks, on the other hand, tend to get tax with hardly any tax benefits should you lose money. Income property is simply the better investment.
With the right strategies, it's possible to create a stable financial future with income property investment. If you decide to take a closer look at real estate, keep these four pillars in mind.
The Young Wealth Team