Real Estate Fundamentals

Core Concepts

Equity — The amount of value you effectively own in a property after subtracting the debt you owe on it.

Equity Formula — Property value − amount owed = equity.

Cash Flow — The money left over after a property's income is compared with its expenses.

Cash Flow Formula — Property income − property expenses = cash flow.

Positive Cash Flow — When a property's income is greater than its expenses.

Negative Cash Flow — When a property's expenses are greater than its income.

Property Appreciation — An increase in the value of a property over time.

Property Depreciation — A decrease in the value of a property over time.

Mortgage — A loan used to purchase real estate, with the property generally serving as collateral.

Principal — The amount of money still owed on the original loan, excluding interest.

Interest — The cost of borrowing money.

Down Payment — The amount of the purchase price that the buyer pays upfront instead of financing.

Debt — Money that a person or business owes.

Asset — Something that has economic value and can potentially provide future financial benefit.

Leverage — Using borrowed money to purchase or control an asset.

Rental Income — Money received from tenants for using a property.

Property Expenses — Costs associated with owning and operating a property, such as taxes, insurance, maintenance, management, and debt payments.

Rental Property — A property owned or purchased with the intention of generating rental income.

Tenant — A person or organization that rents and occupies a property.

Landlord — The owner or manager who rents property to a tenant.

Equity Examples

Question — A property is worth $240,000 and the owner owes $150,000. How much equity does the owner have?

Answer — $90,000. $240,000 − $150,000 = $90,000.

Question — A property is worth $300,000 and the owner owes $220,000. How much equity does the owner have?

Answer — $80,000. $300,000 − $220,000 = $80,000.

Question — A property is worth $280,000 and the owner owes $170,000. How much equity does the owner have?

Answer — $110,000. $280,000 − $170,000 = $110,000.

Question — You buy a property for $200,000 and put $40,000 down. Later, the property is worth $240,000 and you owe $150,000. What is your current equity?

Answer — $90,000. Current equity is based on current property value minus current debt.

Question — A property increases in value while the mortgage balance stays the same. What generally happens to the owner's equity?

Answer — Equity increases.

Question — A property decreases in value while the mortgage balance stays the same. What generally happens to the owner's equity?

Answer — Equity decreases.

Question — You buy a $250,000 property with a $200,000 mortgage. What is your initial equity?

Answer — $50,000.

Question — A property is worth $350,000 and the owner owes $250,000. What is the owner's equity?

Answer — $100,000.

Cash Flow Examples

Question — A rental property brings in $2,000 per month and has $1,500 in monthly expenses. What is the monthly cash flow?

Answer — $500 positive cash flow. $2,000 − $1,500 = $500.

Question — A rental property brings in $2,500 per month and has $1,800 in expenses. What is the monthly cash flow?

Answer — $700 positive cash flow.

Question — A property produces $1,500 of monthly income and has $1,700 of monthly expenses. What is the cash flow?

Answer — −$200, meaning the property has $200 of negative cash flow.

Question — Rent is $2,200 per month and property expenses are $1,400 per month. How much positive cash flow is generated?

Answer — $800 per month.

Question — A rental property's income is greater than its expenses. What type of cash flow does it have?

Answer — Positive cash flow.

Question — A rental property's expenses are greater than its income. What type of cash flow does it have?