Chicken Little loved to say the sky was falling. And if you read all of the newspapers you will see that they like to do the same when speaking of real estate. The media loves all the fodder regarding stagnant growth, reverse growth, minimal growth, large inventories, etc. But, and you need to listen here, it really doesn’t make too much of a difference if you own investment property, especially here in the Kansas City area, and you own it for the long haul.
If you’ve read my blog for any length of time you know I’m not a big proponent of Buy & Sell strategies. Buy & Hold income property is a whole other subject. Inman News is a great portal to keep up on real estate news. And today I read an article on Inman that reported that the home-price index fell 0.7% in the fourth quarter while rising 0.4% compared to the same period of time the previous year. A mixed signal but relatively flat, none-the-less.
However, (read the article) it goes on to speak of growth since 2000. Detroit is the worst city on the index with a rise of 19.51% since 2000 and Miami had the highest rise at 180.87%!
We can assume that Detroit will not face the correction that Miami will. (We don’t know, but it’s an educated guess.) And neither will Kansas City. But lets say Kansas City appreciated somewhere along the lines of Denver at 37% and Dallas at 23%. (I’ll use the 25% number since I believe we aren’t Denver but a little nicer than Dallas…oh, I can see the angry emails now.)
Example: Paid $150,000 for duplex in 2000. Appreciated 25% over the 6 years and now has a market value of $187,500. For the sake of argument, we can say that it really appreciated 27% but over the last year dropped 1%. Doesn’t really matter. The point is your equity grew on appreciation alone by $37,500. Your remaining principal is now $111,230 (or so assuming you put 20% down at 7.0% back in February of 2000) so your tenants paid your loan down an additional $8,770 on your investment property. That’s total equity growth of $46,270.
Therefore, your initial $30,000 cash investment is now worth $76,270. A 254% increase. Are you getting that? You had 25% appreciation on the property but because of leverage you had a 254% increase in your money. How are your stocks/bonds doing?