There are many benefits to owning an investment property. Pride of ownership, portfolio diversification and direct management control are just a few. Let’s face it though, if investment property didn’t contribute to our personal bottom line, few would find it attractive.

So what do successful investors know that others don’t? The secret is to understand the four ways investing in real estate increases your net worth. Let us begin:

1. Cash flow

The most basic and understandable method of making money from real estate is cash flow. Cash flow is simply defined as the net dollar change in your checking account over a period of time (such as a month) that occurs as a result of owning and operating real estate. Put another way, cash flow is equal to the money left over after rent is collected and all bills are paid, including the bank note. Having a positive cash flow is crucial to be able to maintain an investment in the long term.

2. Price appreciation – with leverage!

The appreciation, or increase, in the market value of the property is often responsible for most of the gains from investment properties. This is especially true for short wait times. The old adage, “buy low, sell high,” expresses this basic principle.

What makes appreciation so powerful in real estate is the ability to borrow a portion of the purchase price. Consider an example where a person has $10,000 to invest in stocks or business property. Also, let’s assume that both investment options will appreciate the same amount in one year, say 5%. At the end of the year, the stock account will have a value of $10,500, or an increase of $500.

However, the real estate investor understands leverage; the ability to borrow a portion of the purchase price of an investment. Most investors can borrow 80% of a property’s value. So the $10,000 in cash available can, with this leverage, buy $50,000 worth of real estate. Increasing the $50,000 by the same 5% results in $52,500, or an increase of $2,500. Who likes $2500 better than $500? Answer: real estate investors.

3. Debt payment

This method is derived from the leverage principle presented above. When investors borrow money from the bank to buy real estate, they pay it back with monthly payments just like a home mortgage. A part of those payments goes to interest and another part to principal. To the extent that the rent collected is used to finance the main part of the monthly debt service, this rent money generates the investor’s capital by paying down the debt. Debt reduction increases net worth.

4. Fiscal depreciation

This method of wealth creation is entirely due to the whims of our current tax code. However, it creates real dollars in your bank account, so we need to understand that. Here we go: The government recognizes that buildings age, and as they do, they lose value. They allow us to recognize this loss in value on an annual basis by treating it as an operating expense, such as a utility bill. This operating expense can be used to offset profit from operations, thereby reducing the tax due on those annual profits. The government recovers a portion of this tax loss with the sale of the property through capital gains; However, for most investors, the capital gains tax is less than the operating income tax, so a net profit is realized over time.

Now you know what real estate investors know. What you do with that knowledge is up to you!