As you hold a piece of rental property, assuming you do it right, you gain money each month from cash flow. This is a nice recurring benefit that puts a little money in your pocket each month but it is not the greatest or most profitable part of real estate investing. Those who think longer term are the ones who find the greatest gains in real estate and earn riches.
We must keep in mind that over extended amounts of time real estate increases in value. Notice I said extended amounts of time! You can’t rely on your property to increase in the short term. In fact, in recent years if that was your goal you were greatly disappointed! I think a lot of people miss the value here because we’d like to see the money flowing in today. We don’t want to wait 30 years till the mortgage is paid off to get rich. But if you do wait, you’ll be glad you did. Those 30 years of managing your property will have paid off big time. Let me show you how.
Appreciation rates vary per area that you live in but a conservative appreciation rate would be about 3% over time. So let’s look at one of my properties. It is the same as the one I give on monthly income/expense comparison.
5 years ago my partner and I bought a single family home for $175,000. We put 20% down so the mortgage was $140,000. Here is the breakdown of what our equity would look like every 5 years of holding the property considering appreciation of 3% and the mortgage being paid down over time (by our tenant not us).
See the chart below for equity after: 5, 10, 15, 20, 25 and 30 years
|Property value||Mortgage balance||Equity|
So that is a nice little gain over the course of 30 years. You now have an asset that is valued at $430,000 and you own it free and clear. If we take $430,000 and divide by 30 years we get the average gain per year which is $14,333. Now remember that our initial investment was $35,000. This equates to a whopping 40% annual return on our investment. This doesn’t even take into consideration the money that we received from our monthly cashflow over those 30 years.
I hope you are starting to get excited about real estate as an investment. It takes time but over the long haul I don’t believe there is a better long term investment.