Property values always go up.
Or at least that’s what people believed.
For years, values have consistently climbed higher and higher at an average rate of around 5% per year. Real estate investors rely heavily on price appreciation to maximize their investment for the future. I know that I personally hope my properties will continue to climb in value for many years and I’ll be able to retire before I hit thirty-five.
But what if values don’t increase?
It’s a question worth asking. When you buy a property, you have a lot of control. You can decide many things, such as:
- Where To Buy
- How Much To Pay
- How Much To Improve The Property
However, you do not have control over the future value. While we can hope that property values will continue to rise – there is no guarantee.
So what happens if property prices stay level? What if they never improve? What if they decline? How does that affect your investing? I want to look quickly at three aspects related to this scenario and explain why real estate investing does not, and should not, simply rely on appreciation for success.
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3 Reasons Why Real Estate Investors Should Not Rely Only on Appreciation:
1.) Mortgage Still Being Paid Off
Even if prices never climbed any higher, unless you purchase a property with an interest-only loan, the mortgage balance is still decreasing each and every month. This means next month you will owe less than today, and today you owe less than last month. If you amortized the loan over a thirty-year period, then in thirty years you will owe nothing. Even if your property hasn’t doubled or tripled in value by then you still have significant equity and cashflow.
This is a good reason why, depending on your investment strategy, constantly refinancing and pulling out equity may not be a wise decision. I know there are math nerds out there that will tell me how if I pull out equity at 5% and make a 10% return-on-investment on that money I will be richer. I understand the math (after all, I was president of my high school Math Club…)
The problem is, as Dave Ramsey likes to say, 100% of all foreclosures last year happened to people with mortgages. Don’t get me wrong – I’m not suggesting you shouldn’t finance your properties (though, paying all cash for them is not a bad way to invest if you have the funds). I am, however, encouraging you to look at the long term picture and think of the end game. If prices never climbed, in thirty (or fewer) years you will own a piece of property that is free and clear but producing income.
2.) More Incentive To Make Your Money At The Purchase
You’ve heard the quote, “A rising tide lifts all ships.” This is what appreciation is – a rising tide. It’s also an excuse to invest lazily, assuming the market will bail you out. In the frenzy which was the real estate market in the mid 2000s there were “gurus” out there advocating spending ANY amount to buy a property, because the market would eventually catch up. Thousands of investors lost everything because of this mentality when the market didn’t just stop climbing – it fell (and fell hard).
Warren Buffet is famous for saying, “Only when the tide goes out do you discover who’s been swimming naked.”
This is what happens when investors rely on appreciation to save them rather than relying on cold hard facts and figures. When I invest, I buy property with the assumption that it will NEVER climb in value. Never. Appreciation is the icing on the cake, not the freight train to freedom. If my property was suddenly worth double what I paid, I would be ecstatic. However, if it stayed the same or even decreased – it doesn’t change the fact that I bought correctly and the cashflow is still proving income day in and day out. This is the story behind my favorite property, the Kurt Cobain duplex.
Don’t make the same mistake as the thousands of investors who followed the gurus and lazily invested in anything. Stick to strict buying standards and make your money when you buy – not when you sell.
3.) You Can Always Find Ways to Force Appreciation
The “market” is NOT your property. Each property is different and comes with a different set of challenges and opportunities. Don’t assume that just because “the market” isn’t improving that your own property can’t increase in value either. There are hundreds of ways to maximize your property and increase the value without relying on real estate appreciation. I don’t need to go into extreme depth to cover this, as I discussed specific ways to easily increase property values in my previous article Ten Quick and Easy Ways to Increase Your Property’s Value. It’s enough to know that appreciation can, and should, be forced.
Donald Trump said, “ If you plan for the worst – if you can live with the worst – the good will always take care of itself. ” It’s with these words that I want to close. Appreciation should be an added benefit, not the end game. Invest like values will not increase and you’ll find yourself in the best case scenario no matter what the market does. Even if value does not increase, and I may not be able to retire by thirty-five (and what would I do then but continue my passion of investing in real estate?), I still am able to ensure success and minimize the risk down to almost none. To me, that is more important than the hope that prices will rise forever.
What do you think? Will the market turn around? And does it even matter? Comment below!