This is the second in a series of articles on the benefits of investing in real estate relative to stock.The eight real estate investing advantages are why real estate has made more millionaires than perhaps any other form of investing.The second real estate investing advantage is APPRECIATION.
Appreciation is the increase in value of any asset over time and is the amount by which an asset’s selling price exceeds its initial purchase price expressed as a percent of its purchase price. Appreciation occurs on the total value of the asset and not just in proportion to the amount invested.
However, as we discussed in Part 1, the leverage advantage will continue to reward you in combination with the other real estate investing advantages. Financial leverage occurs when a comparatively small amount of cash invested controls a large asset.You don’t have to own an asset to be rich you just have to control it.Leverage super charges the benefit of asset appreciation.
Continuing the example in the first article of investing $1,000 of your money and assuming10% annual appreciation for all of the investment types, which is of course is unheard of for a saving account; the gain is calculated in the following example.
Example:The gain in your leveraged $1000 investment after 10% appreciation
Investment Type
Investment Value
($1,000 your money)
One year Appreciation
Savings account
$1,000
$100
Stock on Margin
$1,500
$150
401k Matching
$2,000
$200
Real Estate 20% Down
$5,000
$500
Real Estate 10% Down
$10,000
$1,000
Even at a ridiculous appreciate rate for a savings account, it will still take about 7 years to get 100% return on your $1,000 investment.Stock will require about 5 years and the 401k about 4 years to get 100% return on your investment.Using the advantage of leverage, the same appreciation rate will get you 100% return on your real estate investment is just 2 years with 20% down and just 1 year with 10% down.
The actual annual appreciation for a saving account since 1963 is just 0.6% as measured by the 3-month US Treasury Bill.The annual appreciation of stock since January 1963 is 7.98% as measured by the S&P500 index including splits and dividends, which compares closely with real estate with an annual appreciation of 6.16% as measured by the average price of a US home.Leverage and appreciation make a powerful combination that has made so many millionaires through real estate investments.
