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Four Pillars of Real Estate 
Appreciation
Cashflow
Principal pay-down
Tax benefits
Let’s use a real example to look at all four:
Appreciation
Cashflow
Principal pay-down
Tax benefits
Let’s use a real example to look at all four:
Property in question:3 bed / 2 bath
Purchase: $295K
Interest = 3.5%
Down payment = 20%
Location: Worcester, MA
Pillar I: Appreciation 
Over the past 20 years, the average appreciation rate for the City of Worcester has been 2.75% annually. For this property, that would equal = $8,112.5 in year one.
The down payment was $59K, so appreciation alone could be 13.75% return on equity
Over the past 20 years, the average appreciation rate for the City of Worcester has been 2.75% annually. For this property, that would equal = $8,112.5 in year one.
The down payment was $59K, so appreciation alone could be 13.75% return on equity
Pillar II: Cashflow 
The Principal, Interest, Tax, Insurance (PITI) on this property is $1,430 per month.
Rent = $2,200
Gross cashflow = $770 (month) or $9,240 (annual) which is a 15.66% return
(Does not include accrual for vacancy or capital expenses)
The Principal, Interest, Tax, Insurance (PITI) on this property is $1,430 per month.
Rent = $2,200
Gross cashflow = $770 (month) or $9,240 (annual) which is a 15.66% return
(Does not include accrual for vacancy or capital expenses)
Pillar III: Principal Pay Down
This one is simple. Every time I pay the PITI, it includes $375 of the principal that gets paid down (this is year 1, this number gets larger every year).
That’s $4,500 in year 1 that my tenants are recapturing for me!
This one is simple. Every time I pay the PITI, it includes $375 of the principal that gets paid down (this is year 1, this number gets larger every year).
That’s $4,500 in year 1 that my tenants are recapturing for me!
Pillar IV: Tax Benefits 
We are able to depreciate the building (not land) over 27.5 years
The building will be valued at $236K, so that is $8.6K every year that I can write off.
This means that barring any other expenses, $8.6K of my $9.2K gross cashflow is tax free!
We are able to depreciate the building (not land) over 27.5 years
The building will be valued at $236K, so that is $8.6K every year that I can write off.
This means that barring any other expenses, $8.6K of my $9.2K gross cashflow is tax free!
To recap:
Pillar I: $8,112 in appreciation
Pillar II: $9,240 gross cashflow
Pillar III: $4,500 principal paydown
Pillar IV: everything above, except $600, is tax free
(Note: I’ll have to pay taxes when I sell, unless I do a 1031 exchange. I don’t plan to sell!)
Pillar I: $8,112 in appreciationPillar II: $9,240 gross cashflowPillar III: $4,500 principal paydownPillar IV: everything above, except $600, is tax free(Note: I’ll have to pay taxes when I sell, unless I do a 1031 exchange. I don’t plan to sell!)
These are the reasons I love real estate.
Even if one pillar fails, you can lean on the other three!
If you liked this thread, please share the first tweet to get more eyes on it!
Even if one pillar fails, you can lean on the other three!
If you liked this thread, please share the first tweet to get more eyes on it!
