Appreciation + Paydown = Big Equity

There are four benefits to owning investment real estate.

1. Cash flow before taxes.
2. Mortgage paydown by OTHER people.
3. Appreciation.
4. Depreciation.

Let us ignore, for the moment, benefits 1 & 4. And let’s assume the following;

Purchase cost of a property is $150,000.
You put 10% down.
Interest rate equals 7%.

Let’s also assume an annual appreciation rate of 5%. (Historically some years have been higher. Some years have been lower. But let’s assume 5% is your market area’s average.)

After 5 years of 5% appreciation the market value of that property should be about $191,400.

Also, after 5 years of your tenants (OTHER people) paying your mortgage down the remaining balance should be about $127,078.

So in 5 years your equity has increased from $15,000 (initial cash invested) to $64,322 ($191,400 – $127,078). That is about a 428% increase in your investment in 5 years! More than a little better than that IRA I have with mutual funds.

At another time I’ll discuss how the added benefits of items 1 & 4 adjust these numbers.

Leave a comment

Filed under 4 Benefits of Real Estate Investing, Real Estate Investing

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s