There are a significant number of successful real estate investing formulas which have been created over the years regarding the potential creation of real estate wealth. Here are a few real estate formulas which I have followed for many years myself. These formulas may still hold true these days during both boom and bust real estate cycles.
Investing Formulas for Success
These real estate formulas are described by the following acronyms: “A.T.E.C.”, “L.I.D.S.”, and “F.A.T.”. All of these real estate formulas were created by my father almost forty years ago. As I have learned more about the fundamentals of real estate from my father than from any other source, I thought that I would share some of his real estate knowledge.
A.T.E.C. Investing Formula
The A.T.E.C. formula measures elements associated with owning a property, and consists of the following information:
Anticipated Future Value. Appreciation is typically what creates wealth, not cash flow. How is appreciation best determined? Will the property appreciate 5 percent, 10 percent, or a greater or lesser amount each year? What are some of the primary factors affecting appreciation?
The answer may be through another formula described as the L.I.D.S. formula. The L.I.D.S. formula consists of the following items:
Legislation: Taxes, Wages, Environmental, Social, Zoning, and Banking Controls.
Inflation: Wage Increases and Shortage of Supply.
Demand: Ability to Pay.
Supply: Availability plus Increased Replacement. All four of the L.I.D.S. formula elements are constantly interplaying with one another.
“T”ax Savings: Net Cash Flow Gain/Loss
+ Equity/Principal Reduction
= (Tax Loss)
X Tax Payer’s % Bracket
= Tax Savings
– Interest Payment
= Equity/Principal Reduction
“C”ash Flow Ideal % Ratios
Scheduled Gross Economic Income 100%
– Operating and Vacancy Expenses 40%
– Debt Service Loan Payments 50%
= Net Cash Flow Gain / (Loss) 10%
Net Cash Flow Return = 10% Return on Cash/ Total Cash/Equity Invested Equity Invested
You must evaluate all four A.T.E.C. elements before making an informed decision. Both the A.T.E.C. and L.I.D.S. formulas help support the “F.A.T.” (Financing, Appreciation, and Tax Savings Flexibility) formula.
The F.A.T. formula is not a diet craze, but rather a description of important factors associated with real estate ownership. Financing is normally the driving force behind real estate, and the most important part of the F.A.T. formula.
“F”inancing: The controlling and most important factor affecting real estate. 1 to 4 unit residential properties have many more lending options than other forms of properties. The ability to buy or sell properties is primarily affected by the availability of capital for that specific type of property. The severity of our on-going Credit Crisis is just a recent example of how true this statement is today.
“A”ppreciation: Produces the greatest investment return. Many investors purchase investment properties even with a negative monthly cash flow in hopes of a much higher future value.
“T”ax Savings Flexibility: Postpone taxes and retain earnings. How many other forms of investments offer better tax benefits than real estate?
When & Why To Use Real Estate Investing Formulas?
The A.T.E.C., L.I.D.S., and F.A.T. formulas may help investors decide whether or not to invest in specific types of real estate. There are different types of real estate to choose from as we all know, and there are different types of real estate investors. These are but a few of the formulas which may help with the decision making process.
These real estate formulas all try to simplify the complex world of real estate investing. Regardless of when these formulas were created, these descriptions of what may create value still hold true even today. The ability to acquire a $100,000 or a $1 million dollar property with little to no money down has made many property owners quite wealthy over the years.
The significant price appreciation and tax benefits offered through the ownership of real estate may not always be as consistent now as in years past. However, few other investment options though have offered as steady a return as real estate has throughout our nation. Real estate continues to offer tremendous wealth building options for all of us if we continue to learn the basic concepts which worked back in the 1960s, 1970s, 1980s, 1990s, 2000s, and even still today.