I’ve been accused on more than occasion of using too many acronyms. And more often than not it’s a fair accusation! You can blame it on a military father or too much time in the Big 5 Consulting ranks, but I could probably have an entire conversation in acronyms Benefits of Using.
Even if you aren’t talking to yours truly, there are so many acronyms flying around in Real Estate Investing it’s not easy to know which ones are important.Let’s spend some time discussing a wonderfully memorable and important acronym that can make you rich:
CATP denotes the different kinds of benefits that you can receive from real estate. C is for Cash flow.A is for Appreciation.T is for Tax Benefits.P is for Principal Reduction. By owning and operating investment real estate you and your portfolio can realize one, if not all of these benefits.
Cash flow is the benefit you receive every month renting real estate of some type. Cash Flow is money that comes in every month.Assuming that your monthly cash flow is greater than your monthly expenses and debt service,the property will be cash flow positive.As a result, cash flow real estate investing is the safest way to ensure return on your investment.
Appreciation is the benefit you receive when you sell your investment property for greater than what you paid for it (plus any improvements or expenses.) If you sold a home anytime before 2007, you no doubt experienced the benefit of Appreciation.
It is often where you will make some of the largest sums of money in real estate. That said,Appreciation is also the most volatile (i.e., risky and prone to market fluctuations) aspect of CATP. Many who have sold a home in the last year or so can attest to this first-hand.
However several markets have bucked the trend and done quite well. We have had some good success in Texas, Oklahoma and Kentucky – just to name a few markets where we have had some nice Appreciation benefits in the recent past.
The Tax benefits of owning investment real estate are nothing less than outstanding. Imagine owning a dividend stock with very little volatility that pays a 15% tax free dividend. Real estate as an asset class gets all the normal deductions of any investment business with the added benefit of a paper loss called depreciation.
I won’t go into too much detail on it, but you can learn more here. The net benefit is that depreciation as a paper loss can in many cases completely offset the cash flow from your investment property. In certain situations it can offset even more than your current cash flow and you can create a “depreciation bank” or use the excess depreciation to offset any other income.
Principal Reduction is the tried and true model of your tenant paying for your mortgage and principal payment every month.In essence, your tenant buys your property for you over time.Principal Reduction is more a function of loan term than anything else.