All Forum Posts by: Eric James

@Eric James there is no one size fits all answer to your post. It depends on the exact location of the property, type of real estate in that location and many other factors. If you buy in an area with hyper growth, then it will far exceed inflation. It you buy in a dying area, then it will be much worse than inflation. At the same time, if you buy a shopping center in an area that is transitioning, where that type of shopping center in no longer desirable, its worth less - even in the case of a growing sub-market. 

Anyone buying real estate for the appreciation value alone is a fool. Real estate is a great investment due to it's stability, appreciation, ability to leverage and have someone else pay down the debt, cash-flow and tax advantages. It's not a great investment because of just one of those things, but because of all of those things. 

In many markets (including those most popular for "cash flow" these days), appreciation is in fact a myth.  A house in Toledo Ohio (a market I know a bit about) that sold for about $12,000 in 1960  would likely sell for about $100,000-$120,000 today.  $12,000 in 2022 dollars is $117,206.  You essentially broke even if you bought that house 62 years ago.  The same is not true in growth markets.  A house that sold in Marin County California for $18,000 in 1960 (an exorbitant sum compared to what you would get in Ohio at the time) amounted to $175,809 in 2022 dollars.  That house is likely worth $1,800,000 - $2,500,000 today.   

@Eric James

But we have to also consider what would she have been posting in rent? She also could have been house hacking. If she had enough equity she could use a HELOC to do a BRRRR or a flip. The opportunities are there. Real estate opens the door to those opportunities, and appreciation is just the icing on top.

I think you bring up some good points. If we just look at market appreciation and inflation, the gains are not always way ahead of inflation. However those numbers of inflation and appreciation are averages. It’s looking at the growth of the worst areas and the best areas. As investors, part of our job is to buy in the right areas. It does not seem worth while to look at one factor of real estate (appreciation vs inflation) and not consider the other areas. While appreciation is an amazing hedge against inflation (better than any others I know of), owning real estate opens so many doors. Many of which have been mentioned:

- appreciation

- leverage

- loan pay down

- cash flow

- tax advantages

- opportunity for forced appreciation

There are so many other doors that open with real estate. For example, I don’t think you can 1031 exchange a business

I got into real estate for all those reasons if it was just appreciation, I don’t think as many people would be in it. But, this “appreciation” comes with all these other advantages.

@Eric Bilderback was absolutely correct in pointing out that the Debt is really the bet you are making.

You are betting that the Value of the Debt will decline in the future.

If you think about it, Real Estate is probably the only Asset Class that has this unique feature where you can borrow up to 30 years at a fixed interest rate.

Now, imagine the scenario where you borrowed $1 Million to purchase your Real Estate at 5% fixed for 30 years.

When a Wage-Inflation Spiral happens, there is a huge upside to the borrower of this debt because the Asset class pays a fixed amount for the debt but the Renters are bidding up the Rents as their wages increase in the Wage-inflation spiral.

If one borrows $1 Million at 5% for 30 years paying $5,368 per month for this debt AND wage-inflation doubles the rent revenues then you effectively received a huge benefit as the Debt per month does not go up with inflation.

No other Asset Class seems to be able to do this.

As a real world example, last year one of my Apartments was renting for $3,000 per month. I re-rented that same apartment today for $4,100 with just 1 day of Advertising. My Debt payment per month remained the same but my monthly revenue increased by $1,100.

Eventually, Wage inducted inflation will negate the monthly debt payment, which should be seen as eliminating the Debt itself.

That puts a $ Million into my Equity as the Debt essentially disappears.

What other Asset Class does this?

Also, if you think about it, because you are generally using 4 to 5 times Leverage, the Debt is your BIGGEST Bet. Not the Cash Flow or the Appreciation. It is really the DEBT that is your biggest best.

Quote from @Kenneth Rolfe:

Quote from @Eric James:

Quote from @Russell Brazil:

37% of the inflation index is a housing component, and the largest component of the index.  So essentially rising real eatate prices are the definition of inflation.

Real estate isn't purchased at a steady position however. It is typically purchased at a leveraged position. So of you are at a 4-1 leveraged position (20% down, 80% LTV), then you out perform inflation by a factor of 4, before even counting in rent or debt pay down. If you bought in at 3% down, you are at a 33.33-1 leveraged position and you beat inflation by a factor of 33.33 times...or a return of 3,333% per year versus inflation.

 That's correct. Except you're not including the cost of the financing. For example, if you're paying 5% interest on the financing. You're gain from leverage is only the difference between financing costs and inflation.

As long as you’re cash flow positive, the financing component should be offset.  This could be applicable to your primary residence though, but then you could argue the need to compare those expenses to what your expenses would be if you didn’t own the property… which again would likely offset the financing cost.

and on your personal resi have to include NO income tax at all up to 250k for single person or 500k for married.. this is huge and largely not talked about.. tax free equity in high appreciating markets has changed many lives.  when your on the rental hamster wheel you have to either keep going or pay back your deprection etc etc.. but still all in all  RE has many financial benefits

Quote from @Account Closed:

@Steve Donovan Good Morning Steve! Thanks for offering some PM companies. I would like to chat with them if you could pass along some names/emails. I'm going to pass on the cities further south. Part of the reason as I'm less familiar with them but ultimately motivation is more about areas I'm familiar with and would like to show my daughters rather than ROI. I know...not the best investment philosophy but I've already done what I've needed to investment wise in Vegas and now just looking to have fun.

@Andre Crabb thanks for the offer but I will pass. I'm very familiar with the areas I plan to invest in so just looking more to partner with the right property manager/real estate agent.

@Kenneth Rolfe thanks so much. I will connect with Corina. Door County brings back great childhood memories. I've spent a lot of time there.

Best - Heidi

we been poking around the Madison area there is no question that many of the mid west markets mid south and deep south have been over saturated by out of state investors the key now is to find places before the hords OR the turn key operators and their marketing companies find them. ..  I spent my summers in the 60s on Lake Poygan Winneconne area.. fond memories .. I think you see the same scenario that is happening in Idaho and  central and Eastern WA right now  places like Wenatchee that were totally under the radar and some of the most awesome places to live etc people are finding them and rotating north. And of course half of WI and MI goes to Florida in the winter :)  Plenty of water in Florida..