The “A” in IDEAL WEALTH GROWER stands for Appreciation.
Anybody who invests in anything is looking for appreciation. In many cases, it isn’t called this but things like gains, wins, profit, etc.
In simple terms, appreciation is the increase of the value of an asset.
One form of build-in appreciation is inflation. If an area you invest in is steady, meaning the economic environment is stable, people are employed and make enough money to afford to rent your property, the prices will typically also be stable. If the supply and demand for real estate is in balance, there is no good reason for the prices of properties to go up. Except that the value of the money that an asset like a real estate property is bought with is changing with inflation.
A good example can be found in many places in the economy. Take the average price for a car. It isn’t harder to make, there is plenty of them available (probably too many), technology has probably even made it easier to build a car, but still prices have increased over the years.
Here is the list: Average Cost of New Car. Cars according to “The PeopleHistory.com”
- 1940 $850.00
- 1950 $1,510.00
- 1960 $2,600.00
- 1970 $3,450.00
- 1980 $7,200.00
- 1990 $16,950.00
- 2008 $27,958.00
- 2013 $31,352.00
This is true for many things and has to do with the value of money. Decades ago, you could buy a bunch of stuff for $1. Today, you get barely anything for it anymore. Inflation has done its work. That means the prices of real estate is also increasing together with all other prices with inflation.
The other aspects that allow your investment properties to appreciate are related to the market. You have probably heard that all real estate is dependent on location, location, location.
That is a true statement but with a twist that is often left out. If you find the perfect location that has great schools, great shopping, great restaurants, great everything, you can be assured that all these great things are reflected in the market price. All those things and attributes people go out to find using checklist the copied form books or websites and check off should be called “confirmation research”.
When you run the checklist and get to check-off many listed entries you can confirm that the relatively high prices for a location are warranted.
If on the other hand, you are finding a location with relatively low or modest prices you will see that things on your checklist are missing checkmarks.
Either way, you will confirm that the asking prices are properly reflecting the status of the location you are considering.
What does that have to do with appreciation? – Everything.
The real question to ask is not if the things you would like and find on a checklist are in place. The real question should be: “How likely is it that the things that are missing will be coming to the location I am considering reasonably soon?”
Will there be new developments, new building, new schools, new shopping, new companies coming to an area, etc.? The more you can answer those questions with: “Yes”, the more likely it is that you will see appreciation.
So, it’s not really location, location, location. In reality, to have a great appreciation, you are looking for positive change, positive change, positive change.
When that is coming to the area you are considering the prices for the properties will increase because demand to move there will increase. If you can buy before that change has started or is complete, you have appreciation due to demand. This will add to your gain from inflation.
Now that this principle is clear and the importance of change is in plain view, consider rent.
The IDEAL WEALTH GROWER system aims to help you to develop a portfolio of investment residential real estate and I will be happy to mentor you and make my network available to you so you only deal with companies and providers I have tested and approved.
These providers, among other things, sell the properties you want to add to your portfolio. If you find an area that is generally stable but with potential for change, leading to increased demand, the rent you can collect will also increase.
That’s called rent-appreciation.
If you take them together you have at least those three sources of appreciation form your investment properties if you chose in the right location:
- Inflation
- Location change
- Rent appreciation
What still blows my mind when I think about it is the fact that some people in the investment world compare investment real estate with stock and bond and other investments. To put the cherry on the appreciation cake, consider this:
On a property you purchased for $120K and put $20K of your own money down, then rented for $1K/month or $12K/year, here is what happens with appreciation, assuming you chose a location with positive change:
- Inflation over 5 years = 10% (5×2%) Total $10K (10% of $100k)
- Location change over 5 years = 20% (5×4%) Total $ 20K (20% of $100K)
- Rent appreciation = 15% (5×3%) Total $1,800.00 (15% on $12K)
Add it all together and assuming you were to decide to sell after 5 years, you would have gained at least $31,800.00 (actually a little more as your rent would have increased in year 2-4 as well).
On your initial purchase of $120K that is a little more than 25% – pretty good.
When you look at your original $20K investment you have more than 150% in gains. I am not even taking the other letters in IDEAL WEALTH GROWER we discussed previously into account.
Some might say that I am painting too optimistic a picture, and that might be true. On the other hand, if you review certain locations for the last 5 or 10 years, appreciation was much stronger than what I suggest here. That does not mean that the last 10 years predict what the next few years will bring,
In any case, the fact that you only invest 20-25% of your own money for a residential real estate investment but you get the appreciation on 100% of the value and income from the property is just an amazing benefit.
The lesson here is to understand appreciation and then make sure that you find the right partner organizations for aspects of property selection, location selection, financing, property management, etc., so that you give yourself the best chance to benefit from appreciation – maybe even more than my example above predicts.