Let’s take a look at four different types of returns when you invest in real estate.
Cashflow. This is the money that is left over after expenses are paid and mortgage payments are made. If expenses such as taxes, insurance, costs of management and maintenance and the mortgage payment are less than gross rents, then there is positive cash flow. If those expenses are more than gross rents, then cash flow is negative.
Annual appreciation. This is the value by which a property increases or decreases over the course of a year. If a property is purchased for $250,000 and one year later it is worth $275,000, then it appreciated at a rate of $10% and the return is $25,000.
Annual equity changes. These play a major role in determining a real estate investor’s net worth. If someone takes out a loan, each time they make a payment towards paying it back, their net worth increases by the amount of that payment. So if a hypothetical five year interest free loan for $200,000 is taken out, then each month when the borrower repays $2,857.14, their net worth goes up by that amount. This counts as a return.
Depreciation. Property depreciation does not actually mean that you lose money. Owning real estate saves you money in taxes, and those savings count as a return.