How to make money in real estate

For the classic buy and hold investor, there are in general three ways to make money in real estate. Please note that these are general principles and in apply many countries around the world.

1) Mortgage paydown.  Every month that a mortgage payment is made, part of the amount goes to paying down the debt and is like a forced payment plan which goes to your bottom line.  This way of making money is comparable to contributing to a government sponsored retirement plan called an RRSP in Canada, 401k  in America or Superannuation plan in Australia. This is the first thing one must look at when calculating your return on investment.

2)  Positive cash flow. It does not make any sense to buy a property that loses money every month and that is exactly why positive cash flow ( i.e. the overall income of the property pays all of the expenses and has funds left over) is absolutely essential.

3)  Equity appreciation. This is another way of saying buy low and sell high and is what most people call “investing”  Although there is nothing wrong with making money in this matter, it must not be your first consideration but more like your third or even fourth. Just ask anyone who purchased property in the United States in the mid 2000’s and was losing money every month because they cannot cover all their property expenses in a down market.