Asset, equity, income, cost, expenses, and liability in this
write-up will be viewed from a real estate investor's standpoint. They are
interrelated and it will be good for investors to have a clearer understanding of
these words.
An asset is a resource with economic value that an
individual, corporation, or country owns or controls with the expectation that
it will provide a future benefit. An asset can also be something you own containing economic value right now and/or future value. So, we can simply
define an asset as anything of value that can be converted into cash. Assets
are tangible and intangible. Tangible assets include current assets (cash,
inventory, and accounts receivables) and fixed assets (Buildings, land, cars,
and equipment). On the other hand, intangible assets include copyrights,
trademarks, patents, etc. All investments are assets but not all assets are
investments. An investment yields income or profit but not all asset yields
income or profit.
Equity is what an investor will get back after the asset has
been sold and all liabilities paid off. If a real estate investor decides to sell his house, the difference between the current market value and the pending
mortgage is called the homeowner’s equity.
Income is money received, especially regularly for work
carried out or through investments. In real estate, the money received by the
landlord for renting out a property can be considered an income. This passive
rental income is received monthly or annually. Real estate income can bring a lot of cash flow to the landlord who is not paying a mortgage.
Cost and expenses are often used interchangeably by many
people. In real estate expenses come to the investor in different forms such as
a mortgage, insurance, repairs, maintenance, etc. Expense is the amount paid
regularly to keep the business going. Types of expenses include variable,
fixed, intermittent, and discretionary expenses. While cost is an amount paid
to acquire an asset. Cost is an amount that has to be paid or spent to buy or
obtain something. Cost is usually a one-time payment. The two types of cost are fixed and variable costs. The money paid to acquire a building or land is a
fixed cost. Additionally, depreciation on construction equipment, tools
rentals, safety equipment, licensing fees, etc. are examples of fixed
costs. Variable cost is money paid as
disposal fees and environmental remediation costs for a construction site that
demolished existing structures.
So as a real estate investor, you will have to deal with variable expenses that change monthly. This includes raw materials, piece-rate labor, commissions, delivery cost, etc. Fixed expenses are those payments that remain the same from month to month such as mortgages, property manager fees, etc. The intermittent expenses occur at various times throughout the year such as property maintenance expenses. Discretionary expenses are usually non-essential spending for things that are not important. For example, installing expensive lighting or plumbing fixtures in a house may not necessarily change the rental rates. Real estate investors need to track their spending because this has a significant effect on the budget of the building during construction or as a rental.
So we pay a cost for an asset that puts money in our pocket
as income from rentals and liabilities remove money from our pocket as expenses
not yet paid. These words help investors to better plan their business both in
the short and long term to ascertain profitability.
- Different Streams of Income Relating To Real Estate
- Take Baby Steps In Real Estate Investment
- Investing In Real Estate In An Unfamiliar Territory
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