What You Should Know About the Roles of Inflation & Appreciation in Buy & Hold Income

by | BiggerPockets.com

When most people think about building wealth, they envision putting money in their savings accounts or adding to their 401Ks. I think that’s awesome, but it’s slow and won’t get you very far. Let’s look at why, then we’ll get into the benefits of appreciation and how it can help you get farther in buy and hold real estate.

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The problem with any investment strategy is inflation. In the U.S. inflation (decrease in the value of money over time) has averaged about 3.2% a year since 1913. This means for every dollar you save, you lose about 3.2% of its buying power every year. Well, what if your bank gives you interest? The average savings account will give you a 0.06% return, which leaves you with a loss of 3.14% a year. You could invest in a 5-year certificate of deposit at 2% and lose 1.2% a year. If you have a 401K, you can expect more in the 6-7% yearly return over time. Now we’re getting somewhere. If you made 7% a year, you would make 3.8% above appreciation so it’s actually growing over time.

Related: Examining Real Estate and Inflation on a Global Perspective

While investment accounts can give you a good return, you only get a return on what you put in. No leverage. For example, let’s say you drop $50,000 (no monthly additions) into a 401K for 20 years. At a 7% return, you would end up with $193,000. If you take into account appreciation loss over time, you would have made $105,000 in today’s dollar value or a little over double the initial investment. Can we do better than this? Absolutely.

Rich people are rich because they look at money very differently. Instead of seeing money as something you earn, save and put into retirement accounts, they try to create it from thin air. Let’s look at how that works.

In real estate if you put 15% down to buy a property, you get a return not only on that 15% but also the other 85% because of appreciation. Let’s use the $50,000 401K investment example above. Let’s say you put 15% down ($50,000) on a $330,000 investment property and appreciation stays at 5% (2% less than the 401K) for 20 years. Your property would be worth $876,000. If you include inflation loss, you will be left with a $471,000 property in today’s dollar value. With the same amount of money as was put into the 401K example above, you will have made almost five times as much return.

Appreciation in Real Estate

Most new investors value property in terms of cash flow (cap rates and gross rent multipliers) and stop there. Cash flow is getting the car started; appreciation is how much gas you have in the tank. Appreciation is the interest rate on your investment and is one of the three pieces of buy and hold income:

  1. Loan pay down
  2. Cash flow
  3. Appreciation

Example 1: Good Appreciation

A $330,000 home at 5% appreciation over 20 years = $876,000.

Subtract inflation and the value of the home in today’s dollars will be $471,000.

Appreciation gain in today’s dollar value over time = $471,000 – $330,000= $141,000.

Example 2: Low Appreciation

A $330,000 home at 3.2% (equals inflation) appreciation over 20 years = $619,000.

Subtract inflation and the value of the home in today’s dollars will be = $330,000.

Appreciation gain in today’s dollar value over time = $330,000 – $330,000 = $0.

In the above scenario, an increase in appreciation of only 1.8% left the owner of the more highly appreciating house with $141,000 more than the same house in an area with lower appreciation. Let’s say you averaged $500 a month cash flow over 20 years on both houses. That would be worth $120,000 or less than what appreciation brought in. Appreciation can be a huge factor in determining the worth of your investment over time. 

If you remember one thing from this article: always check inflation to see how it might impact your investment decisions over time. It’s just one more tool to help you get to where you want to be.

Einstein said it best: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Related: The 10 Real Estate Markets With Highest Home Price Appreciation

Location and Appreciation

If you look at data from all over the U.S., you’ll notice that coastal states tend to appreciate faster than inland states, cities appreciate faster than rural areas and the west coast appreciated faster than any other area of the U.S. in the past 25 years. Grant Cardone, who has amassed over $350,000,000 in real estate, suggests investing in democratic voting areas because people living there are willing to pay more for homes/rents, and they don’t like new construction, which creates higher demand and drives values up.

Areas with higher appreciation come with a higher increase in rental rates because high appreciation is caused by low supply and high demand. I’ll admit finding something that cash flows in high appreciation areas can be impossible.

The ideal way to go about this is to find areas that are still somewhat cheap but will increase in appreciation over time. These places have all of the features that drive appreciation in your area. If you don’t know what I’m talking about, call a real estate agent and ask where they think prices are going to go up in the future and why. Leverage that knowledge from someone who does real estate for a living. Another option is to get a copy of the city’s general plan and see where they think growth will be. That’s where you want to be.

Did you take appreciation into account when choosing where to invest?

Leave your comments below!

About Author

Brett Lee

Brett Lee is a licensed Real Estate Broker in Portland Oregon where he helps people achieve a better future so they can do the things that truly make them happy. Brett is also a buy-and-hold investor, property manager and investment advisor.


  1. Hey Brett,
    Nice to know that there is somebody in the same state that is bold enough and intelligent enough to post some good insights on the bp super highway.
    You are for sure right that cash flowing properties can be a problem in these coastal states. People talk about buying properties for 40 K and getting them to assess for 60 K and the concept that these are decent houses took me a bit of time to get a handle on. and yet their rents are hanging right in there with a lot of our higher priced housing.
    Appreciation I maybe gave a little to much consideration while inflation was the devil that I thought I would outrun but those 2 together are what makes or breaks an open market buyer. BP and their grouping of posts on adding value to your rentals actually opened my mind to the concept that maybe things that I was just giving away, storage, garden space, indoor outdoor dog kennels, ect. had value to the amount of an additional $500 on my most challenged property.

      • Roy N.

        Income is taxed … both in my country and yours. Whether you own properties in your own name, or in a corporation, the IRS or CRA are going to get their tithe.

        In the author’s blog post above he illustrated the impact of inflation on investment income (both interest and appreciation). Taxes should also be considered. If your marginal tax rate is 30%, and your hurdle is a 5% net return, then you will need a pre-tax return of 7.15% to achieve it.

        • Nathan W.

          If your effective equals your marginal of 30%, fire your accountant ASAP and start taking deductions! The beauty of buy and hold properties is the depreciation you can take on them which will largely offset most of your income.

  2. Robert Horton

    I’m starting to think we need to value real estate the same way we value stocks…..ie, there will be increases and decreases in value over the long term.

    Most homes in the US appreciated 2-3% since the 1940s until the Crash of 2008. I’m starting to think the price of homes today may be the same 5 or even 10 years from now.

    I understand the leverage part of investing in real estate, but that only works if there is appreciation. For now, my strategy is flipping…..get in, get out. I would love to have some rentals but don’t see that as a viable alternative in my area (midlands of South Carolina) The numbers just don’t work compared to the expense in maintaining the asset. (unlike stocks & bonds)

    I would like for someone smarter than me to explain what will happen to current homes and new construction prices if rates increase…..and they will, sooner than later. What happens when they rise to 6%, 7% or higher?

  3. Craig Bellot

    Good article.

    One other huge benefit of inflation if you have a long term fixed rate loan is it reduces the real balance by that 3.2% every year without you doing a thing.

    20 years down the line when your rents have increased, your fixed debt payment will seem so tiny!

    Asset keeps up with inflation, rents keep up with inflation, and loan value gets paid off by inflation!

  4. Larry T.


    Good article but you miss a crucial point. In my area houses generally just keep pace with inflation. But you can still make money on appreciation! How/Why? Because you are leveraging your inflation.

    Let’s take your $330K property with $50K down, $280K mortgage balance, on an interest only loan (to avoid bringing paydown into the calculation) on a house appreciating at inflation pace. After 20 years, it will have appreciated $289K to $619K total value. (Don’t adjust for buying power that confused the issue.) If you sold the property you would pay off the $280K balance and walk away with $339K. Your annualized rate of return on your $50K investment would be 10%!

    Oddly, you would do better the sooner you sell. What if you sell after 5 years? You’d sell for $386K and have $106K cash. That would be an annualized rate of return of 16! (The reason for the diminishing return inflation is increasing your equity, thus reducing your leverage a little every year. At the beginning your have 20% equity, leveraging the other 80%. At the end of 20 years you have 55% equity, leveraging the other 45%.)

  5. Robert Horton

    Larry, you make an excellent point about the effects of your rate of return using leverage. Instead of a long-term buy and hold strategy of 20-30 years, use leverage to exit within 5 years and move on to the next property with your profits. You can either increase the value of your next purchase or purchase multiple properties.

  6. John Thedford

    Thanks for the article. This is why I am a firm believer in buy and hold rentals. One thought on inflation: many argue that the Fed’s numbers are not accurate and that actual inflation is quite a bit more. When the Fed took housing and energy out of the equation that did skew the numbers (whether rightly so or not). Bottom line for me: buy and hold; get the best tax advantages; ride the market increases; and have sustainable monthly income far surpassing anything the government would ever do or could ever do for me.

  7. Eduardo C.

    I’m a bit confused on this article. You are comparing leveraged real estate investments with unleveraged 401K contributions. This is not apples to apples. Using your assumptions leveraging stocks would crush the real estate 5% appreciate if you leveraged it. But, we all know there are some dangers with leveraging and that is if things go south you will be in a world of hurt.

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