If you knew that being able to correctly calculate real estate return could result in the difference between a small investment result or a truly large estate would you take the time to learn and apply the five components?

Equity discount means the difference between what you can sell the property for and what you pay for it. For example, if you paid $100,000 and you sell it for $120,000 the next day then your equity discount was $20,000. Equity discount could be the largest single factor or component.

Many people know that when they buy a foreclosure or "fixer-upper" that they are buying it below market value. They just don't realize there is a term for the difference.

Not only is there positive equity discount like the example above when you are buying the property below market value, but there is also negative equity discount. This occurs when you buy a property for above market value.

Why would you do that? Perhaps the cash flow is great enough to make it worthwhile. Or maybe you can get it for no down if you pay a little more and you feel that it will be worth while to do it.

Cash flow is something most investors know something about. It's simply your net operating income less your debt service or mortgage payments. Net operating income is your gross income less your expenses. So basically cash flow is what you have to spend after paying for your expenses and mortgage payments. Most people feel that this is the most important parameter in real estate return.

Principal payoff is the amount of your balance that you pay off whenever you make a payment. Most of your payment, at the beginning of your amortization schedule, is interest. What isn't interest is simply your principal payoff.

Tax savings means the actual amount of money that you saved due to having the property. You basically multiply the depreciation by your tax rate level to compute this. For example, if your depreciation is $4,000 and you're in the 15% tax level then the actual amount of tax savings that this property is worth to you in real dollars is $600.

The last real estate component is appreciation. This is the growth rate of the local real estate nearby. If the real estate goes up 5 percent and your real estate is worth $500,000 then your actual appreciation was worth $25,000.

Once you've calculated these five factors simply add them together and then divide by the down payment. Let's say that you buy a property for $100,000 and it's worth $120,000. So your equity discount is $20,000. The cash flow is $2,000 for the year. The principal payoff is $200 and the tax savings calculates out to $500. All these all calculated annually. At the end of the year you find out that the appreciation was $5,000 (5% on $100,000).

The total is $27,700. Let's say your down payment was $5,000. Thus, in reality your return rate turns out to be 554%. Much better than a bank, you say? There is some risk involved, however.

Note how the equity discount turned out to be the largest real estate component of return (400%). Was it worth it to be able to calculate the return rate? Can you see some possibilities for purchase and investment right now?

Jim Evans is the co-owner of Property Exchange, LLC. He is the author of Equity Recycling Key to Real Estate Wealth and gives seminars called "Master Guide to Modern Exchanging", and the new "Multiple-Profits Real Estate Investment" seminars. His rate of return, option, and rehab formulas will soon be available on In-Hand.Com software for the Palm and on Microsoft applications. Jim has taught real estate principles for two colleges and three real estate schools, adult education classes, and is featured in national magazines, television, radio, and other Internet articles. He can be reached at 801 (685 2711) or e-mail him at trader@trademls.com. Investors may request a free information kit on his programs.