Four profit centers of real estate
Real estate profit center #1: Cash flow on operations
As the name implies, this is the cash flow profit center of real estate. If you're holding real estate as an investment, you will have tenants. Each month they will pay you rent. Let's say that you own a rental house and get $1,200 per month in rent. Over a year, that is $14,400 in income. Now, subtract out your expenses, which include things like your taxes, insurance, your property management, vacancies, turnover expense, allowances for repairs, etc. (This doesn't include your debt—more on that later). For purposes of this example, let's assume that your monthly average expenses are $200 a month. Your cash flow on operations would be $1,200 per month. That is what is referred to as your Net Operating Income (NOI). Out of your NOI, you pay your debt service. Let's assume for this example that you have a $180,000 property with a $144,000 loan at a rate of 3.5%. That's a debt payment of about $647 a month. So, that would be the rental income of $1,200 minus $200 in operating expenses minus $647 in debt service, equaling $353 in cash flow. That monthly cash flow times 12 equals $4,236 in cash flow per year. That $4,236 divided by your $36,000 equity stake would equal to 11.8% cash-on-cash return. But that's not the end of your real estate profit story. Let's move on to the next profit center: Amortization.
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