I have a question for you. Where do the rich hold their money?

Is it in RRSPs? Is it in stocks, bonds, or mutual funds? Is it gold or silver? What about businesses? Maybe it is under their mattress?

Historically, the majority of rich people own real estate, as it has been an excellent vehicle for building and holding wealth. One of the things I really like about real estate investing is that it is easy to understand. Here is the formula for making money in real estate:

People either live, work, or play in your building, and pay you rent. That’s it! EASY to understand.

In this article I would like to review some ideas on how money is made through real estate investing. I have learned that there are seven different “profit centres” of real estate. This was taught to me by a very successful real estate investor and I find it easy to remember. She taught me that the profit centres can be remembered by thinking of a Spanish matador, EL CP TAR. Each of the letters in the acronym stand for a profit centre.

E-Equity

L-Leverage

C-Cash Flow

P-Principle Pay Down

T-Taxes

A-Appreciation

R-Reinvestment

There are some other schools of thought that teach a little bit differently but I really like this one because it’s simple, and easy to remember.

Let’s take some time to dig into that first profit centre, Equity. When we are looking at real estate, equity is the difference between the amount of money that is owed on a property and the amount of money that a property is worth. Let’s look at a quick example. If you own a home worth $500,000 and you owe $200,000, there is $300,000 in equity. If you were to sell your home you would receive $300,000. The really great thing about equity in real property is that as the value of the property increases so does the amount of equity in that property.

Another great aspect of real estate is that if you can find a property that is worth $500,000 and you can get a good deal on it for $475,000 you have immediately created $25,000 in equity.

Beautiful!

Over the next number of articles I will break down each of these profit centres so we can really dig into them. We will learn how each one of these profit centres is a benefit, and put them all together, we will see how really powerful real estate investing can be. Stay tuned to find out more about Leverage next month!

Brad Chisholm is a Realtor® and real estate investor based in Saskatoon. You can find him at bradleychisholm.exprealty.com or at 306-220-2217.

-Brad Chisholm