Are your real estate investments growing your wealth?

Genevieve Signoret & Delia Paredes

(Hay una versión en español de este artículo aquí.)

Suppose you’re retired and own one or more real properties you invested in to create a cashflow to supplement your retirement savings. Are these properties growing your wealth?

Real property you manage yourself is an alternative asset that produces return in two ways: income and capital gains.

Rental income can be broken down into its various uses, roughly as follows:

• The portion needed for upkeep and upgrades to offset depreciation;
• That needed to cover property taxes and management services such as the fees you pay to your property manager and accountant;
• Interest on debt;
• Profits.

If you are taking all the profits out as household income, your property can grow only as fast as your property goes up in value.

If by contrast you are reinvesting all profits in other wealth-generating assets, your wealth is growing considerably faster. Thus is the power of compounding!

So, is your real property growing your wealth? If you are taking out all its profit as supplementary household income, yes, as long as your investment property is going up in value. Although it would be growing your wealth faster still if, instead of taking out all the profits, you were reinvesting them.

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