There are two common ways for investors to build wealth through real estate investments: equity buildup and cash flow growth.
- Equity buildup: As property values appreciate and debt is paid down, equity buildup occurs and, as a result, an investor’s net worth increases.
- Cash flow growth: A steady stream of unearned income comes from rental payments. This positive cash flow comes when an investor buys a property at a good price, finances the purchase wisely, and controls expenses.
By having a financial strategy, investors have the goal to “Buy it right — Pay it down — Pay it off!” This means:
- Buy it right: An investor should make sure they are getting a good deal on a purchase. This will ensure the best equity buildup and cash flow growth possible.
- Pay it down: As the investor pays down the loan, they will increase their equity buildup.
- Pay it off: Paying the property off will result in a stream of unearned income, where the investment starts to generate profit.