WHY RENTAL REAL ESTATE BEATS MANY OTHER INVESTMENTS
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What is the great principle by which wealth is created?
Leverage.
What is Leverage?
Just as a lever allows a small weight to move a large one,
it is the ability, with investment, to create a large return from a small
amount invested.
Real estate can be mortgaged and it can be rented. Very
often the rent will pay not only the cost of the mortgage but other expenses
such as property taxes, insurance and the cost of management. This enables an
investment to own a home on a small amount down, such as 20%.
If you borrow 80% of an investment property’s value, and the
market appreciates 10% in a year you will have gained a 50% return on your
investment. Lake County since 2011 has done way better than this every year.
In 2015, average sale prices for homes in Lake County rose
17.89% over the year before, according to the Lake County Multiple Listing
Service. This means if you bought a home in 2014 with 20% down, on average you
will have obtained a return of 89.45% on your initial investment a year later.
In fact the average home sale price in Lake County has risen 72% since 2011,
from $123,299 to $212,128, but someone who bought a property in 2011 with 20%
down, will have increased their investment by 360% over 5 years, or an average
of 72% for each of those 5 years. We have many clients have made just these
kind of gains over this period, and are very happy for it. What other
investment do you know, that can offer this kind of return?
Especially for an essential commodity. Every one either owns
or rents a home (except for the few that are homeless). Every home has a new
replacement cost, and so the value of homes, can always be reflected by the
cost of replacement, and therefore is normally relatively predictable, except
for dramatic financial events such as happened in 2008, which turned our sense
of value upside now, but even so, has now begun to return to a reflection of
the cost of replacement.
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