Chicago Relocation

Capital repayment and appreciation – Part 2

February 6, 2010

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So, now that we know about cash flow and depreciation in Chicago luxury investment property - what about capital repayment and appreciation?  Everyone knows the latter (isn’t that why we’re in this current crisis?)  But many people forget the obvious advantages of the former!  Back to our earlier post about $3000/mo. PITI and a $5000/month in rental income – let’s forget for a moment about the obvious profit (and tax liability) there.  Let’s remember the REAL point – Someone else is paying your PITI (principal, interest, taxes and insurance)!  Obviously you have a down payment being tied up and not earning (or losing) money in equities or other investments, but the money in / money out is being taken care of by your tenant.  So while they’re not gaining any equity – you are.  There are thousands of amortization tables out there (try this). It may only be a few thousand dollars in the early years (interest is always somewhat front end loaded) but in the course of thirty years – guess what – someone paid off your investment property! And each year you’re receiving the same (or presumable more) rent off the property.  So in a simplified world – If you hold this property for thirty years charging $5,000/mo in rent at the end of thirty years you’ll have no mortgage and a cash flow of something in the arena of $60,000 annual income on the property.  And you never (hopefully) went “out of pocket” to pay it down.

Now it won’t be that simple of course, but capital repayment is probably the most overlooked of the ways to grow wealth in luxury real estate investment.  The final way, appreciation, is self explanatory, except for one thing that everyone has forgotten – the antonym: depreciation.  The good news, however, is that over a long term hold period you are historically (almost) guaranteed some appreciation.  Just don’t bank on it the way everyone has in the past.  Look at the four factors, invest wisely, and someday you can kick that tenant out of that luxury rental and move in yourself – rent free!

“But you must pay the rent”