Most people have heard that around 90% of U.S. millionaires made their wealth through real estate. Wow! How powerful is that? That, however, is a very broad statement.
With 5 different potential streams of income (depending on how and what you invest in), where is the big wealth created?
Is it the cash flow, the tax benefits and deductions, the equity build up from paying down the mortgage, the leverage capabilities of using the bank’s money or the appreciation of the property?
As most seasoned investors will share with you they made the lion’s share of their real estate wealth through the appreciation of the property.
The National Association of Realtors shows that in the past 50 years the average home values rose by 5.4%. That is a substantial number.
On a $100,000 property (rounded down to 5%) that is a whopping $5,000 per year in just the appreciation benefit from real estate investing.
Indeed, you can and should get good sustainable cash flow. Cash flow is the oxygen that allows an investment to survive and should be your first consideration when purchasing buy and hold real estate. However, the equity build-up though appreciation tends to be your strongest wealth creator.
Double your money in 14 years
Using the above example, $100,000 property appreciating at a rate of 5% per year, allows you to double the value from $100,000 to $200,000 in value in about 14 years. At the end of year one you go from $100,000 to $105,000 now in year two you add 5% to the new $105,000 value and at end of year two you have a value of 110,250 this continues forward to bring you to a value of $197,993 at end of year 14 and $207,892 at end of year 15.
So why do so many people avoid talking about appreciation?
With such a strong wealth creator, do you really want to ignore the power of appreciation? Many people I talk to say, “since you cannot control it just pretend it does not exist and if you get appreciation consider it a bonus.” Not me! I’d rather be purposeful and respect such a valuable wealth creator.
Appreciation rate over time
It is obvious that no one has a crystal ball and therefore no one knows for sure what an appreciation rate will be over time. However based on thousands of conversations, everything I read and my own personal experiences, there has been tons of wealth generated with just appreciating values. Yet most people avoid the topic because they cannot guarantee you an appreciation because there are so many unknown forces that can change the trajectory of appreciating values.
Look to the future for appreciation
On a national average, home appreciation tends to mirror inflation and this would make sense. Home values cannot outpace inflation because they would become unaffordable for the masses.
On a local level appreciation may look much different than the national scale. The national average gives us a great benchmark to compare against but as a savvy real estate investor you want more than average.
Outpace the national average
Locally you want strong job growth, job diversity, population growth, consumer confidence all to outpace the national average. It goes without saying if you invest in a market where all these economic drivers are stronger than the national average that the appreciation in that market would also be stronger than the national average.
Local government aimed at attracting jobs, baby boomer and or millennial appeal and a number of things can all suggest the potential for growth is strong and therefore home value appreciation will be strong. When you target markets that outpace the national average you can also be fairly confident that appreciating values will also outpace national average and therefore you have been purposeful to capitalize on the strongest wealth building principle in America today, the appreciating real estate values.
Guarantees may not exist but being purposeful and doing your diligence will allow you to invest in maximum appreciating markets.