Appreciation + Paydown = Big Equity

There are four benefits to owning investment real estate.

1. Cash flow before taxes.
2. Mortgage paydown by OTHER people.
3. Appreciation.
4. Depreciation.

Let us ignore, for the moment, benefits 1 & 4. And let’s assume the following;

Purchase cost of a property is $150,000.
You put 10% down.
Interest rate equals 7%.

Let’s also assume an annual appreciation rate of 5%. (Historically some years have been higher. Some years have been lower. But let’s assume 5% is your market area’s average.)

After 5 years of 5% appreciation the market value of that property should be about $191,400.

Also, after 5 years of your tenants (OTHER people) paying your mortgage down the remaining balance should be about $127,078.

So in 5 years your equity has increased from $15,000 (initial cash invested) to $64,322 ($191,400 – $127,078). That is about a 428% increase in your investment in 5 years! More than a little better than that IRA I have with mutual funds.

At another time I’ll discuss how the added benefits of items 1 & 4 adjust these numbers.