Learn To Be Rich

In my previous articles I talked about some of the benefits to investing in real estate. If you recall, there are six distinct benefits to investing in real estate. They are income, depreciation, equity build up, appreciation, leverage and control.

In this article I will be talking to you about the one that tends to be the biggest contributor to your return on investment and that is appreciation.

First, what is appreciation? Appreciation is the tendency for house prices to rise over time.

Now, before we get too far into this–and especially in our current real estate market–I want to address the idea that house prices go down. Can house prices go down? Yes. Can house prices stay the same? Yes. Can house prices go up? Yes.

If you look back over the last 50 years or so, you will see that house prices have trended up at a rate of over 6% each year. Have there been down years? Yes. Will there be down years in the future? I imagine so. However, inflation tends to make things more expensive over time and housing is no exception.

So, I expect house prices to rise over time even if we do have some short term dips in housing prices.

So, what is the big deal with appreciation when you are investing in real estate? Well, let’s look at a quick example.

Let’s say you purchase a $100,000 house. If housing prices are appreciating at 5% per year (remember the actual average is over 6%), then at the end of the first year, the house would be worth $105,000. At the end of two years, it would be worth over $110,000. In fact, in just under 15 years, the $100,000 house would be worth have doubled in value and would be worth over $200,000

If you had a 30 year mortgage, by the time your tenant’s have paid off your mortgage, the house would have double twice in value… from $100,000 to $200,000 and $200,000 to $400,000. So the one little $100,000 house you purchased and let your tenants pay off would be worth $400,000 in 30 years with a modest 5% per year appreciation rate.

So, to become a millionaire, just buy two and a half (why not just make it three?) houses for $100,000 and keep them as rental properties for 30 years as your tenants pay off the mortgages.

That’s the benefit of appreciation to real estate investors.

Until my next post,

James

This entry was posted on Saturday, March 29th, 2008 at 11:20 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.