In his third or fourth “Rich Dad Poor Dad” book, Robert Kiyosaki expresses the advantages of investing in real estate by describing another type of cash flow quadrant.
This cash flow quadrant describes the four ways to generate money through investing in real estate.
They are: depreciation, tax benefits, rental-income, and appreciation.
I like this model as it is simple to understand and remember.
Let’s define each one a little bit more clearly:
- Depreciation – This is, thanks to Alan Greenspan, the amount structure loses in value over time, assuming no improvements have been done to it. Residential real estate, for example, is considered to fully depreciate its value in 27 1/2 years. So, for the purpose of taxes, an investor may choose to take that depreciation as a deduction. If the structure is worth $200,000, it’s depreciation for the year is $7273.
- Tax benefits – Anyone who holds a mortgage for property knows that all that mortgage interest is tax deductible. Similarly, when acquiring additional properties, the mortgage interest from those properties are also deductible, as well as improvements made to that real estate.
- Rental income – When we put a tenant into a property, be it residential, commercial or industrial, we usually receive an amount of rent associated with that occupancy. Hopefully that rent will cover the mortgage payment with some money left over.
- Appreciation – We all know that although we take depreciation at tax time, the property itself is actually appreciating in value as cities and populations grow. Typically, unless a major economic or whether related disaster occurs, real estate only increases in value. That is why banks and other lending institutions are willing to lend most, if not all the money to purchase properties.