Have you ever talked to an old timer who bought their home when they got married and lived in it for the past 40-plus years. Have you asked how much they paid for it? The increase in value is astounding! Even though we have seen the housing market fluctuate, including the crash in 2008, overall home values continue to rise.
In the past two years we’ve seen home values jump substantially due to low inventory. Market value has increased between 12%-20% depending on area and studies. Every week we see homes selling for over list price, continuing to push the average home value up. According to a study by the National Association of Realtors, the long-term trend of annual home price appreciation is 4%. Even with ups and downs, home values continue to increase.
Inflation also plays a huge role here. In 1989 the average home price was $94,000. Last year the average price was $386,900. The change in price, adjusted for inflation, is 67.94% (U.S. Bureau of Economic Analysis).
What all of this data shows us is that homes hold their value and increase in value. It also shows us that investing in real estate is a long game. (We’ll cover flips later.) If you can buy property and hold onto it for many years, that’s when you make the most gain.
In addition to market value increase, you will gain equity each year. What is equity? It’s the difference between what you owe on the property and what the property would sell for. So each year your debt goes down, but your property value goes up. This means you have more “cash” sitting in the property. In time you can leverage this equity to buy more homes, sell it to use the proceeds for a better property, or take the cash and pay for something in the future (like your child’s college education).
Another thing to keep in mind is that you will be renting this property. You will want this property to “cash flow”, meaning you walk away each month with some money after expenses are paid. Over time rent rates increase as well, but your mortgage payment stays the same.
All of this comes together:
- Increase in market value
- Increase in equity
- Increase in rental rate
Investing in real estate can be very profitable. It’s a great place to put your money. It’s a long game, so the sooner you start the better!