The Benefits of Owning Investment Real Estate

Few investors (if any) would ever shell out money on investment real estate unless it generates a favorable rate of return.

Placing capital in real property with the expectation of generating a return is the hallmark of real estate investing and it is simply smart for any individual investor to consider all the returns of owning investment real estate.

In this article, we want to discuss the returns an individual investor can expect to receive from both monetary and non¬monetary sources associated with income producing property as investment (not the ownership of personal residences).

Both sources of which, though not necessarily a moneymaker in its own right, are returns to the investor nonetheless.

Monetary sources of benefits include those that can be directly measured by costs or returns of that component. In other words, how much money (in dollars and cents) can be made by owing the rental property?

1. Income. Rental income that remains after operating expenses, debt service, and taxes is cash flow that becomes your income.

Naturally, there are factors that might influence the rental income you receive over time such as the competition in the market, or a change in the market that dramatically alters the market and causes a wide disparity between what renters in the past are now willing to pay at this point; nonetheless, if your cash-in survives and exceeds your cash-out, it's money in your pocket.

2. Appreciation. This results in what may be categorized as real or nominal increases in value of the property.

• Nominal increases in value mean a property has increased in absolute dollar terms.
• Real increases in value occur if an asset increases in value at a rate that exceeds the appropriate measure of inflation in the economy or market basket that is being used as a measure of purchasing power.

Appreciation may be realized through either the sale, other disposition of the asset, or by borrowing against the increased value of the asset.

3. Financial leverage. This monetary return is associated through use of borrowed funds.

Positive leverage results in making money by using borrowed funds (other people's money) that cost less than the return they enable, thus resulting in magnifying the rate of return on investor equity and simultaneously enabling the investor to control a much larger investment than would be possible without borrowed resources.

Non-monetary sources of benefits are less obvious but can be measured by personal investment objectives and opportunity costs associated with the particular benefit.

1. Pride of ownership. Direct ownership and control of an investment in real estate enables one the opportunity to control one's destiny through managing and making one's own decisions about that investment. This may be lacking under a leasehold agreement for commercial real estate.

2. Security. The knowledge that an investment is under the investor's control provides a measure of security. Controlling the ownership of land and improvements at a specific location to insure uninterrupted tenure at the same address for a business, for instance, may be vital to the survival, growth, and ultimate success of a business. Or it may be have to do with estate building in order to insure financial security upon retirement.

3. Diversification. In this case, an investor may purchase real estate as an investment for portfolio diversification in order to spread risk by having a diversity of investments among different investment types.

4. Tax shelter. Finally, it should be noted that most real estate investments involve tax shelter advantages arising from opportunities to defer tax on income through depreciation and a variety of tax credits.

James Kobzeff is a real estate professional and owner/developer of ProAPOD Real Estate Investment Software.