Income Producing Property (IncP) is real property that earns an income for the investor. Income is the difference between rents and other receipts less expenses, like maintenance, management fees and perhaps debt service (mortgage payments.)
There are many types of IncP. Commercial property includes office buildings, strip malls, parking lots, industrial, warehouse, etc. Residential includes single family homes, townhouses and condominiums and multi-family, like apartment buildings and mobile home parks. Here is a profit and loss statement for a mobile home park currently for sale in N. California:
The $1.112M investment provides $75,211 per year in cash flow or $6,268 per month. Let’s look at another example, a one bedroom, 780 sq ft condo in our building in San Francisco:
If cash flow was the only criteria, would it be better to invest in 4 condos (the down payments are equivalent for both investments) or Lincoln Village MHP? Let’s look at the numbers: $2,237*4 = $8,948 /12 = $746 a month vs. $6,268 a month. Clearly, not all properties cash flow equally!
If the cash flow was the same for either option – which is the better investment? To answer, first, we’d need to understand the investor’s objectives and fully consider these criteria in our analysis. Second, we’d evaluate a range of financial and operational issues and develop an investment plan, projecting expected income and expense over the hold period for the investment. Finally, we’d calculate and compare expected returns comprised of net income, principal pay down and appreciation. In future blogs we will address all of these issues so stay tuned!
Finally, here’s a quote from an article a few years back in US Today entitled, Path to Wealth is Through Real Estate Holdings. The authors, who have studied the affluent since 1991, said the following, “If you dream of being really rich, you will need to actively invest in real estate. Building up a nest egg with the equity in your home is a fine thing. But what distinguishes the model for getting rich, staying rich and passing it on is its emphasis on investing in current and future income-producing real estate.”
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