So this article is what I call the real estate quadrant. I use this a lot for teaching. I haven't brought it
out yet, but to you guys, we're doing it today.
: Introduction
These are the four types of real estate returns. So when we're talking about deals with my acquisition folks, my property management folks, we're usually in one of these categories. So I'm going to do this article on this entire quadrant. But more importantly, that I'm going to get into a separate the articles on each one of the quadrants and go a little bit more deep. But for purposes of this the article, I'm going to walk you through the first four.
: Appreciation
So the first one is is a lot of people talk about appreciation, which of course, is one of the first of the four types of real estate returns. So when we're talking about appreciation, we're really talking about two kinds of appreciation. The first one is market appreciation.
And so that basically is buying something and letting the market take it up higher. It really doesn't require a lot of experience. It really is generally luck. And I know it can be timed a little bit. It can be. While there's a lot of people moving in and hopefully the market carries you up a lot of people right now. If you invested in the last four or five years, you've pretty much experience mostly market appreciation and you think you're all very, very, very bright as a result of it. But wait until the market corrects, it goes back down. That's when it really starts to become real.
The second one is what I call forced appreciation, and this is what I really, really like. So forced appreciation is getting into the deal itself and finding a value add a way to lower the expenses or increase the income or lower the vacancy and basically create value.
So those are the two kinds of appreciation. I'm going to go into much more detail on an appreciation video later. So the next piece is benefits, and these are primarily based around tax. So let's take a look at the benefits of real estate, and this is one of the things that you would obviously use when you're talking to your investors. A lot of times people are focused on appreciation, but more than sophisticated investors, they're focused on tax savings.
: (Benefits (Tax
Benefits (Tax
So some of the benefits are obviously cash flow. Another benefit is obviously appreciation. But then now we're going to get into some of the tax things. So we have depreciation, which is essentially a non expense that you can use to write off any cash flow that you might have. And that's tax free. Another one, of course, is a cash out refinance, which we're going to talk about in the debt side. And that's essentially using debt to buy something and then using more debt to pay off that debt through what's called a cash out refinance.
Usually that happens when you do some kind of forced depreciation. So that's certainly another one. There are also other things like a ten, 30 11 exchange and cost segregation. And if you don't know what these are, that's totally fine. But these are massive benefits. And as you start to deal with more and more sophisticated investors, this is where they're mostly going to sit. Just this morning, I was having conversations with of people, and all of them were focused around tax because as you start to sell stuff, this is where they are.
Some of your investors are going to be focused on cash flow and others are going to be focused primarily on tax. It's just important that, you know, both and those are two points of real estate returns that you need to be well versed on as you start to raise capital and in a future. the article I'm also going to do one on benefits, which is going to be primarily a video on the tax benefits and things like asset protection , appreciation, cash flow, et cetera. So be sure and not to miss that one. So the third type of return in a real estate investing quadrant is cash flow.
: Cashflow
And of course, cash flow has three components. It has income and has expense, and it has debt. So obviously there's a lot behind each one of those. And don't forget to watch my cash flow video because
we're going to go into a lot of detail. There are definitely ways that you can increase your income. There are definitely ways that you can reduce your expenses, and there are definitely ways that you can manage your debt all to generate more cash flow and cash flow is exactly what you need if you're going to raise capital for any kind of investor, for any deal. And the fourth and final quadrant, of course, in the four types of real estate returns is the debt quadrant.
: Debt
And of course, I'm going to do a whole the article on this as well. But. There are things that the debt quadrant that you may or may not know, like debt is OPM, other people's money, that's what debt is. So when people put their money into insurance policies or pensions or even the bank, then those become liabilities to those particular institutions and they lend them out in the form of debt, primarily and often in the form of equity.
That OPM is a liability to someone else, and they have to give it to you in order to make it work for them so that they can make more money by giving the money to you. That's how the whole system works. There's things in the debt quadrant that you need to understand, like loan to value, like term like debt coverage ratios, things like that. There are ways to manage your debt, but the best thing about that is that your tenant pays it down for you through the cash flow side.
So those are the four types of real estate returns. This is the real estate investment quadrant. These are the four categories that you need to pay attention to as you're going out and finding deals and as you're raising capital. Each of these four quadrants are going to be very important for you to understand and also for you to grow your financial well-being through real estate.
