There are four benefits to owning investment real estate.
1. Cash flow before taxes.
2. Mortgage paydown by OTHER people.
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.