Understanding the Real Estate Wealth Triangle

Real estate wealth is created only when one or more of the following three vital elements are satisfied:

* Cash Flow - This is when the properties income exceeds its costs and there is an annual profit from the property.

* Capital Growth - Properties value increases over time. capital value of real estate has increased consistently over the recorded history and will continue to do so in the foreseeable future due to the population pressure and increase in supply of money.

* Equity - Is the immediate equity investors gains when they purchase property at a discount or below value.

These three elements form the three sides of the real estate wealth triangle. If you are not making use of either of these three elements then you cease to be an investor and there is no possibility of you gaining any financial return.

In every phase of the property cycle (Boom, Slump & Recovery)You should try to achieve one or more of the above 3financial results.... Gain immediate Equity, Cash Flow or CapitalGrowth. And if the market didn't shift between phases thenthe Triangle would get out of balance with one sidehaving more expansion than the others.

Let us examine three phases of the property cycle to understand what happens to the real estate wealth triangle :

Boom Phase

* Capital Growth is very Strong because of the huge demand
* Cash Flow properties are very hard to find because of the increase in prices, interest rates and static rentals
* Equity - It is almost impossible to buy property at a discount because there are too many buyers chasing too few properties

Slump Phase

*Capital Growth is virtually zero or going down
* Cash Flow properties become easier to find as the interest rates start to decrease
* Equity is still hard to find as vendors are still unrealistic about discounting property having seen the hay days of property growth.

Recovery Phase

*Capital Growth is flat and showing signs of increasing
* Cash Flow properties are easily available due to decrease in interest rates which are at their lowest, increase in rents & inflation
*Equity is available in truckloads because property can easily be bought at a discount as there are desperate vendors and very few buyers. Foreclosure properties are at their peak.

Intelligent investors understand the property cycle and how to use the real estate wealth triangle to their advantage. They strategies to harvest the profits using the strongest available side of the triangle. They have the skills to convert "Immediate Equity" into "Cash Flow"."

As I write this article the property markets world over are sliding rapidly to their bottom most point. There is likely to be very little capital gain in next couple of year as the financial systems that are life blood of property have collapsed. It will take some time for these institutions to get back on their feet .

The two thing readily available in the current market are instantaneous equity and cash flow. In some ways immediate equity is better than future capital gain. We can make immediate profit rather than wait years for capital gain to happen. You can convert this instantaneous equity into cash flow through some innovative mortgage financing.

An ideal situation will be if you can cover all the three sides of the real estate wealth triangle when buying an investment property. As we have seen this difficult to achieve and will require skill and circumstances. Most ordinary investors manage to achieve only one element at a time. If you can manage two sides of the triangle in a given investment situation you will be very successful with your property investing.

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