Investing in real estate has long been considered a smart move for building wealth. Two key reasons for this are the steady home appreciation and the ability to leverage your initial investment. In this blog post, we’ll explore these concepts in detail, showing why real estate remains one of the top ways to build wealth.
Understanding Home Appreciation
Home appreciation refers to the increase in a property’s value over time. Historically, real estate has shown a steady trend of appreciation, making it a reliable long-term investment. Looking at data from the US Census Bureau, homes have appreciated at about 5% annually in the US for the last 40 years.
In our current housing market, demand from homebuyers surpasses the supply in inventory, which have been supportive of home prices and are this trend is expected to keep home values appreciating in the future. At the end of Q1 2024, home prices appreciated by 6.6% year-over-year in the US with the breakdown by state you can see in the chart below.
Lastly, a recent Home Price Expectation Survey by Fannie Mae, which polled over 100 housing experts across the industry, projects an expected increase in home values by 20.8% from Q1 2024 to Q4 2028. This means a home purchased for $750,000 at the beginning of 2024 is expected to rise in value to $906,000 by the end of 2028.
The Power of Leverage in Real Estate Investment
When you purchase a home, you typically provide a down payment and pay closing costs, while the rest of the purchase price is financed through a mortgage. This means you control an asset’s full value with your initial payment, which is considered a form of leverage. As the property appreciates, the return on your investment is calculated based on the property’s entire value and its market exposure, not just your down payment. If we compare this scenario to investing in the stock market, we can see the power of leverage even though the S&P 500 has provided a higher average annual rate of return at about 10%. This leverage magnifies the potential for wealth accumulation through real estate.
Example:
- Purchase price: $750,000
- Down payment: 5% ($37,500)
- Closing costs: $7,500
- Total Initial Investment: $45,000
With this initial investment of $45,000, you gain control of a $750,000 asset.
Real Estate Gain:
- Total Initial Investment: $45,000 (down payment and closing costs)
- Value of Home When Purchased: $750,000
- Average Annual Rate of Appreciation: 5% (Home Values Last 40 Years)
- After 5 years, the Home Value Increases to: $957,211
- 5-year Gain in Value: $207,211
- Return on Investment (ROI): 460%
Stock Market Gain:
- Total Initial Investment: $45,000
- Value of Stock When Purchased: $45,000
- Average Annual Rate of Return: 10% (S&P 500 Last 30 Years)
- After 5 Years, the Stock Value Increases to : $72,473
- 5-year Gain in Value: $27,473
- Return on Investment (ROI): 61%
Homeseed Can Help You Get Started
Discover the possibility of owning a home and investing in real estate with some of our exclusive loan programs that require little to no down payment. This means you can potentially start building equity and wealth with very little upfront investment. Our commitment is to make homeownership accessible and financially advantageous for you. Contact us today to discuss your goals, explore available opportunities, and make informed decisions about your real estate investment.