There are four basic returns inherent in real estate investment property that can make a real estate investor money. We’ve already discussed cash flow and appreciation, let’s consider the third: loan amortization as it applies to a mortgage on an investment property.

3. Loan Amortization. There’s no mystery here. Amortization means “to reduce periodically,” and therefore loan amortization simply means a periodic reduction of the loan over time. In other words, each mortgage payment includes both interest and principal designed to pay off the mortgage in full over the life of the loan. Use an amortization calculator to create an amortization table for any equal installments (of interest and principal combined) loan and you’ll get the idea.

Okay, so as the owner of a income property investment, it’s all about an opportunity for you to make money. How? Each time your tenants pay you rent they provide you with cash to pay down your debt and, as such, are virtually helping you to buy the property.

I’m flattered that many of you are asking whether or not you’re permitted to post my real estate investment articles in your own newsletters. The answer is, Yes. I’m always glad to freely share real estate investing information with customers, subscribers, and the real estate community as a whole. All I ask in return is to be given credit for the authorship and a link back to the ProAPOD website.

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1. For newsletters that are printed. Please include the following text at the bottom of the article as follows:

About the Author

James R Kobzeff is a licensed real estate broker and developer of ProAPOD Real Estate Investment Software: Cash flow, rate of return, and profitability analysis software for rental income property. www.proapod.com

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2. For newsletters that are online. Please include a hyperlink to http://www.proapod.com in the text as follows:

About the Author

James R Kobzeff is a licensed real estate broker and developer of ProAPOD Real Estate Investment Software: Cash flow, rate of return, and profitability analysis software for rental income property. www.proapod.com

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The prudent real estate investor always considers several basic returns to determine the potential benefits of purchasing, holding on to, or selling an income property investment. We’ve already discussed the importance of cash flow, and now for this second part of our multi-part series on how an income property investment makes you money, we’ll look at appreciation.

2. Appreciation. Appreciation is the growth in value of a property over time. In other words, future selling price minus original purchase price equals appreciation. For example, let’s say you own a rental property investment worth $350,000 that you purchased for $250,000 in 2001. The amount of money your real estate investment appreciated over a time period of five years is $100,000 (350,000 - 250,000 = 100,000). Staightforward enough; but looking back from today doesn’t answer how much growth over how much time for a real estate investor trying to project appreciation on a real estate investment about to be purchased.

Let’s begin with a fundamental truth about real estate income property: real estate investors really are buying the income stream of a rental property. So it stands to reason the more income you can sell, the more you can expect your property to be worth. Likewise, the faster you can increase the income stream, the faster your property will most likely appreciate. In other words, follow the revenue. Determine the likelyhood of an increase and throw it into the decision making. Here are some things to consider.

1. Market conditions. Is there anything about the location that could change and make the property more attractive, and thus shift the balance of supply and demand?
2. Economic inflation. Will rising costs of new construction generally drive rents up?
3. Physical improvements. Does the property lend itself to improvements that might demand higher rents, attract and keep better tenants, or reduce vacancy losses?
4. Operating expenses and management. Are there wasteful expenditures you can readily minimize?

We’ll consider another way how an income property investment makes you money next time. So stay tuned. In the meantime you might want to preview a sample cash flow statement to see how you can project appreciation over a ten-year period on a property to see whether or not it meets your investment goal.