When considering commercial or investment real estate, you often hear three words, “Location. Location. Location.”
Those three words, in that order, are used when investors describe the top three investment criteria.
Well, there are three more words that follow location, location, location. They are “Cash Flow” and “Depreciation.”
And like the first three words, these next three words have nearly the same meaning for most investors for this set of three.
Inasmuch as cash flow is comprised of income (rents, fees, charges, and reimbursements) minus expenses (administration, marketing, staff, management, maintenance, utility, tax, and insurance), Depreciation can be an enhancement to Cash Flow for a finite period of time (the depreciation schedule).
Depreciation is often the largest off set (some individuals look at this as the same thing as a normal operating expense) to Cash Flow. It is simply the acquisition price of the real estate, including closing costs, and certain rehabilitation costs, all taken as an annual charge against net revenues based on a depreciation schedule.
And under the advice of an experienced CPA, the actual calculation can be very powerful to cash flows. But be careful, no one needs to buy investment real estate for depreciation only. Paying income taxes on cash flow created from investment real estate is not so bad of a problem to have, the alternative is to fund losses.
So if it is the first three or next three words in commercial real estate, seek the advice of experts and pay heed to them.
