Real estate through the years has offered investors one of the most diverse and most profitable ways of accumulating wealth and income. With real estate, you can see it, you can feel it, you can use it, you can put it to work for you to produce income, it increases in value, it gives tax shelter, it is safe and some is very liquid. It can work exceptionally well and be an integral part of your investment goals.
All real estate has expenses associated with owning it. The operating expenses for income producing properties can include the following: Accounting, Advertising, Legal, Insurance, Janitorial, Lawn Care, Leasing Fees, License Fees, Office Expenses, Pest Control, Property Management, Property Taxes, Repairs & Maintenance, Resident Manager, Salaries & Wages, Snow Removal, Supplies, Telephone, Trash Removal, Travel, Vehicle Expense and Utilities.
After all the expenses of a property are paid from the rents, what is left over is the NOI or Net Operating Income. If you divide that number by the asking price of a property you get the Cap Rate or Capitalization Rate (free & clear return). For Example: If you paid $1,844,000 for a 32 unit apartment building with an 8% Cap Rate, you would be getting $147,520 return on your investment after all the expenses are paid, which is your Net Operating Income. This brings up a couple of questions. Has this been a consistent number through the years? Is this a typical Cap Rate in the area at this time? Are there any deferred maintenance or other large expense issues coming up?
If you are in the process of transitioning cash into other assets, income producing real estate can be an outstanding vehicle to protect your investment and at the same time give you a good return in cash. If you purchase free and clear income producing real estate, historically it will keep up with inflation both with appreciation and with cash flows. By transitioning cash into a hard asset like real estate, you are not only going to maintain the value of your principle, but in many cases you will receive a cash return that is hard to rival with other investments.