If you’ve lived through the recent real estate and economic recessions, the very title of this article may cause some pain. In the not-so-distant past, this country was swept with an economic crisis that many of our generation had never seen. It felt like the market would never recover.
Fast forward a few years and now, once again, long term wealth is being built through real estate and the opportunity is available to the average American.
The Appreciation Factor
Appreciation, or the rising of home prices over time, is how the majority of wealth is built in real estate. While prices can fluctuate, real estate values have consistently increased over time and there’s no reason to think that’s going to change.
According to the National Association of Realtors (NAR), the average price appreciation of a single family home ranged from 29% (seven year tenure) to 39% (ten year tenure), with average gains of $38,000 to $49,500 respectively.
One thing to consider when it comes to real estate appreciation affecting your ROI is the fact that appreciation combined with leverage offers huge returns. For example, if you buy a property for $300,000 and it appreciates to $330,000, your property had made you a 10% return. However, you likely didn’t pay cash for the property and instead used the bank's money. When considering that you may have put 10% down ($30,000), you have actually doubled your investment, which is a 100% return.
The Longer You Own a Home, The More Equity You Gain
Net worth, in the form of equity, is one of the first measures of the financial benefits of homeownership can build over time. On average, after 7 years, single family homes see a $4,000 increase in equity every year.
Inflation is a little-known reason why real estate creates wealth so powerfully over time. In general, our money supply is worth less every year. As the value of money decreases, the prices of goods and services increases, which is why everyone loves to tell the story of how cheap a bottle of coke and a hamburger used to be!
When it comes to real estate, the majority of your big expenses, such as your mortgage and property taxes, stay fixed for the majority of the time you own the property. When you combine this with rising rent and home values, you start to see reliable results.
It’s easy to understand that real estate can create wealth but it’s important to know why. There are many ways to build wealth in America but real estate is one of the simplest, safest ways to do so.