Equity Buildup

There are two ways to build financial wealth by investing in real estate. I know that sounds way too simple, but it’s true: There are just two. The two ways to make money in real estate in-vesting, the two drivers of financial wealth, are Equity Buildup and Cash Flow Growth.

When you look at Equity Buildup closely, you discover that it comes from two factors: price appreciation and debt paydown. If you buy it right, your real estate investment will begin with a margin of equity right away. Over time, as you rent the property, the two natural forces of price appreciation and debt paydown work together to increase your equity. Obviously, if the market value increases, your equity in the property goes up, but it also goes up because you are paying down the debt through the mortgage. Thus, as the mortgage debt decreases over the term of the loan (30 years, 15 years, etc.), your equity increase consistently.

“Once I got really clear on the numbers in real estate, I realized that it was one of the best games in the world for building wealth.”

Todd Tressider
Millionaire Real Estate Investor
Reno, NV

Cash Flow Growth

As good as all this Equity Buildup is, it is not the whole story. There is the added benefit of Cash Flow Growth to consider. Net Cash Flow is achieved from a real estate investment when the rental income you receive is more than the costs you incur. The costs include your expenses, an allowance for vacancy, and debt service (the mortgage payment on the property).

For now let’s just say that if you buy it right, finance it wisely, and control your expenses, you can achieve a positive Net Cash Flow. As rents appreciate over time (historically, they increase at about the same rate as price appreciation), the cash flow will grow. Once the loan is paid off, the Net Cash Flow grows dramatically because your monthly mortgage loan payment goes away.