4. Low Risk
Any investment has potential risk, and you can indeed lose money in real estate. However, there are reasons why someone might lose money in real estate. These reasons are generally predicable, and can be avoided or minimized through advance knowledge and applying proven principles.
Real estate has traditionally been a secure, stable investment compared to other investments, especially if one buys prudently and with advance knowledge. Toda’s current low interest in fixed-term investments is causing investors to consider other options. An investor might be concerned about the equity stock market risk, recent negative experiences with certain categories stocks, or low returns. A buoyant economy with the attendant sense of confidence in one’s employment, and natural comfort and affinity for real estate, is another factor contributing to the real estate investment environment.
Example: There are various reasons for the relatively low risk, which naturally will vary depending on the geographic area, desirability of location, stability of the market, and other factors. These factors include: population increase, less land available, up to 50% renters in metropolitan areas, low interest rates, ease of financing for highly leveraged property, intrinsic need and demand for residential real estate, and consistent history of land value appreciation exceeding rate of inflation. The real estate market is cyclic and, depending on location and other factors, eventually will increase in value.
5. Appreciation
The increase in value of your original capital investment in the property over time is the key appreciation factor. The national average has been about 5% a year for real estate over the past 25 years. It should be stressed that this is just an average. Certain geographic areas or locations have had considerably more than the “average” increases in value, especially if it is a well-selected and maintained property, in a growing and desirable community.
Example: If the real estate cycle is going up in a high demand area, the appreciation could go up as much as 20% to 50% or more in one year. When you apply the ROI calculations in this scenario, as discussed in point # 1, the ROI on your original personal down-payment can be very considerable.
6. Equity Build Up
When you make payments on your mortgage, you are paying down on the principal over time. As you are reducing your debt, you are at the same time building up your equity that is the portion of your original loan that you no longer owe any debt on.
Example: In practical usage, most people commonly refer to equity as the amount of clear value in the property that the investor owes, free and clear of any debt. In realistic terms, the true equity is what you would net upon sale, after all real estate commissions and closing costs are taken into account. Lenders realize this as well, which is why they generally do not like to lend if 100% of the equity would end up being pledged, in order to minimize their risk and leave a margin for safety for the future.
