When real estate investors talk about appreciation they are talking about the tendency for real estate to go up in value over time.
Real estate prices can rise and fall over time, but real estate investors often believe that over long periods of time real estate tends to increase in value.
There are definitely real estate markets where prices have not gone up. In fact, there are real estate markets that have gone down over time.
However, if you look at charts of the United States national real estate prices over long periods of time, the trend before the dip in prices in 2008 has been an annual rate of increase of between 6 and 7% per year.
There are many factors that can cause real estate prices to rise over time including supply and demand. House prices tend to rise as the demand for those houses is strong. House prices tend to drop as the demand for those houses is weak.
Inflation, or the overall value of a dollar, can cause prices to go up. If a dollar, over a period of time, is worth half as much then the price of housing will tend to be about twice as much.
Often related to inflation is the cost to rebuild the same property. The cost to build a property can affect its value.
Interest rates can affect whether real estate prices appreciate or decline.
Until my next post,
James
P.S. Successful real estate investing is done with teams… take your real estate investing business to the next level with our Real Estate Investor Bronze Membership and add me to your team.
I have a reputation for beginning most conversations about real estate with an easy to remember acronym that describes the many benefits of investing: IDEAL.
Each letter in IDEAL stands for a one of the advantages of investing in real estate: income, depreciation, equity buildup, appreciation and leverage. Actually, I usually add in control as another benefit, but I digress.
While most investors really emphasize income, leverage and appreciation, today I wanted to narrow in and focus on equity buildup.
If you have seen any of my very detailed, deal analysis blog posts (and it is hard to miss them because I’ve analyze deals for over 280 US markets and marketed the heck out of them), you know that I actually calculate and include the financial benefit of equity buildup.
So, what is equity buildup? Simply, it is paying down the loan on your property. The less you owe the more equity you have (assuming the property value stays the same). So, as you pay down more and more of your loan over time, you build up more and more equity because you have decreased what you owe.
One great thing about the equity that accumulates from paying down your loan is that it is a guaranteed return: if you pay your mortgage payments, you get the return. Plus, your return increases over time. Why? Because you are actually paying down your loan faster and faster with each passing year.
Let me explain: in the first year of a 30 year amortized loan, your payment is mostly interest. In fact, from all of your payments for the entire first year you end up paying off about .9% (less than 1%) of the total loan balance. In the second year, your principal pay-down grows slightly so that you pay off about 1%. In the third year, you end up paying off 1.1% of the loan and each year it increases until, in the last year, you end up paying off about 8% of the original loan amount.
Here’s another way of looking at equity buildup that I personally use. I have a spreadsheet with all my rental properties listed down one side and columns that match each of the benefits from IDEAL listed across the top. I look at the column for equity buildup like I am actually putting that money into a savings account (called equity in my house). With one or two houses it may not seem like that much… a hundred dollars here, a hundred dollars there per month, but get a portfolio of investment property like I have and you’re putting away serious money each and every month. For example, if you had $1,000,000 worth of real estate loans (whether that’s five $200,000 houses or ten $100,000 houses), you could be gaining over $800 per month from equity buildup.
What’s great about this is that, as I mentioned above, this amount grows each year since you end up paying more and more toward principal with each payment. So, the next year you might be saving $850 per month.
It’s kind of like a forced savings plan, because it happens automatically every month that you pay your mortgage, whether you intend to save money or not.
So, when you do your own real estate investing analysis don’t overlook the powerful benefit of equity buildup in your calculations.
Until my next post,
James
P.S. If you want access to my Housing Analysis Spreadsheet and to be able to download over 100 of our real estate investing courses plus get free consulting for your business, I encourage you to upgrade to our Real Estate Investor Bronze Membership now.
What if we could help you increase your cash flow so that you had more money coming in each and every month to do with as you pleased?
With this audio program (one of over 5 dozen real estate investor audio programs in the Top Secret Courses series), you will learn ways to improve your cash flow from buying and holding rental properties (we’ll even discuss strategies for markets that are tough to have positive cash flow in).
In addition, we will talk about ways to have cash flow from regular, systematic large chunks on cash from wholesaling, refinancing or selling properties plus much more.
This audio program includes the following:
- We are discussing primarily the I part of Real Estate as an IDEAL Investment…
- Although, we can generate cash flow with HUGE PAYDAYS from selling, wholesaling or refinancing instead of monthly income
- Focus on cash flow on a house by house basis: Buying based on NOI versus Equity
- Vacancies can crush a small flow… and some solutions
- The top methods to boost cash flow…
Details:
- Featuring Jassen Bowman with Sasha
- Running time: Approximately 70 minutes
- Includes access to members only password protected website with outline and supplemental information
- Product ID: TSC0005
Couple this real estate investor audio program download with the additional training materials, checklists, systems, free real estate investor forms and free real estate investing business consulting that comes with the Real Estate Investor Bronze Membership and make cash flow challenges a thing of the past. Upgrade to the Real Estate Investor Bronze Membership or use the link below to just purchase this audio program without all the extras that come with Real Estate Investor Bronze Membership:
