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The rising of home prices over time also known as appreciation is how the majority of wealth is created in real estate. While prices fluctuate, over the long run real estate values have always increased, and there is no reason to believe that this is going to change.
One thing to consider as it relates to real estate appreciation affecting your Return on Investment (ROI) is the fact that appreciation combined with leverage offers maximum return. By nature, real estate is one of the easiest assets to leverage. Not only is it easy to leverage the financing of it, but the terms are very favorable compared to any other kind of loan. Interest rates are currently below 5%, down payments can be as low as 5% and loans can be amortized over a 30-year period. If you buy a property for $300,000 and it appreciates to $330,000, you have a 10% return. However, if you have financed putting down a 10% down payment, you actually have doubled your investment with a 100% return.
One of the best benefits of investing in real estate is the fact that not only are you generating revenue but also are paying down your loan with every payment. You often hear that with rental properties, it’s actually the tenant who is paying off the loan. When investing in residential real estate, ensure that any purchase you make generates more income than it costs to own resulting in a positive cash flow and can appreciate over time. Smart investors always purchase property with a positive cash flow providing a consistent revenue stream independent of market whims affecting capital appreciation.
Forced equity is a term used to refer to the profit that is made when an investor makes improvements or enhancements to a property to make it worth more. Unlike appreciation where you are subject to market conditions that you cannot control; forced equity allows investors the ability to pro-actively increase the value of the property.
Historically, in real estate, your risk of loss is minimized by the length of time you own the property. When the market improves, the value of your home increases, and as a result, you build equity, Unlike the stock market, where there is risk and several external factors that can negatively impact your investment, real estate provides more control of your investment.
It is also a fact that the longer you hold onto real estate, the more money that you will make. The housing market has always recovered from past bubbles that caused home appreciation to drop, and from those who held on to their investments during down markets; prices have returned to normal.
It is important to know that the purchase price is the main factor that determines your profit in the future. To buy right, it is best to work with a professional Realtor who knows the local market and can determine the potential value of a property. Once you know the market value, factor in any renovation and other costs to accurately determine your potential profit. There are many ways to generate wealth but investing in real estate is one of the better ways to do so.
Hope that you have found this blog to be of value. Should you have an interest in buying or selling real estate in the South Florida market and not currently working with an agent, please do not hesitate to contact me at (954) 547-09483 or via email at jaykenney@SFPropertyTeam.com.
Jay Kenney
