Weekly Special | July 22, 2024

Investment Secret—Leveraged Appreciation

When we compare the change in the median home price with the inflation rate, we find that homes appreciate more than 1.2% faster than inflation, a strong sign that homeownership remains a great investment for protecting and gaining wealth.

The graph above plots the five-year average annual inflation less housing (Consumer Price Index for All Urban Consumers: All Items Less Shelter in U.S. City Average) in blue and the five-year average annual home appreciation rate in red. Since 1954, the average rate of inflation has been 3.31% while the average change in the median home price has been 4.51%.

Leveraged Appreciation Example Imagine you’ve got $50,000 to invest. You use towards a 20% down payment plus closing costs on a $213,000 home.

You’re now controlling an asset worth nearly five times your initial investment.

Let’s say the property value increases by the 74-year average of 4.51% per year. That’s $9,596 in appreciation in the first year. Now, if you’d bought a $50,000 property cash, that 4.51% would only be $2,255. But because you leveraged your investment, you’ve gained $9,596 on your $50,000 – that’s a 19.2% return!

Also, the rent from your tenant is also paying down the mortgage principal each month. Let’s say that adds up to $1,476 in the first year. Add that to your appreciation, and you’ve gained $11,072 on your $50,000 investment. That’s a 22% return in just one year!

It takes less than 20 years to turn $50,000 into $500,000 by owning leveraged residential real estate. See next week’s video for more detail.

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