Why Appreciation Is Most Misunderstood Real Estate Investment Concept

Posted @ 6:59 pm - Filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Retirement Income, Buying Income Property, Investment Lessons, Capital Growth, BawldGuy Axiom, Palo Alto

When speaking to audiences in historically high appreciation areas, it’s common to hear them voice serious concern with regions I’m recommending. Their real problem? They’re lookin’ at appreciation at the cost of capital growth — theirs. They’re literally penalizing themselves to the tune of millions over the long term. In baseball terms, strikeouts are cool, but how many earned runs a pitcher allows per game is the real gold standard. No? Ask yourself if for the big game you’d want the guy who strikes out 12 batters a game but has a 5.3 ‘earned run average’ (ERA), or the guy who hardly ever strikes anyone out but only allows three runs a game?

Not a difficult decision, is it? ‘Course not. It’s obvious on it’s face. Why? ‘Cuz in baseball the winner is decided by how who has the most runs at the end of the game — not the team sporting the pitcher with the most strikeouts.

Appreciation = Strikeout Pitcher whereas Capital Growth = Very low Earned Run Average

In real estate investment terms, here’s how it shakes out in real life.

Let’s say you’re in the Bay Area of NoCal, and poppin’ your vest buttons ‘cuz properties are selling via multiple offers, with some appreciation. Let’s inflate ’some appreciation’ to 10%. Income properties there require 40-50% down payments to break even on a month to month operational basis. Let’s use 40%.

Invest $100,000 at 40% down buys you a $250,000 property. Those in SF or Palo Alto can stop laughting — it’s just an example. If the first year’s appreciation rate is 10%, your capital grew by $25,000. On the other hand, if you’d have bought properties in one of the regions we currently recommend, you’d have acquired $1 Million of new property. If the first year’s appreciation was just 5%, your capital grew by $50,000.

I dunno, you make the call.

Over time, the only hope for places like California and places like it, are to resume double digit appreciation year after year. Don’t wanna burst yer bubble, but the odds on that happenin’ aren’t, uh, in your favor, know what I mean, Verne?

Even with all things being equal, which they aren’t and won’t be, what’d'ya think the increased flexibility multiple props gives you? Oh, did I forget to mention triple to quadruple the tax shelter? Oops, my bad.

BawldGuy Axiom: Appreciation is for show, while capital growth is for dough.

Purposeful Planning understands this truth. There are now thousands of real estate investors who are learning the differences the hard way. Their retirement income will be the victim, if they don’t modify their outlook. That’s a nice way of sayin’ you’re sabotaging your own retirement if you’re buying appreciation instead of capital growth.

For those anxious to start growin’ their capital, your first step would be to click right here, and start a conversation — one I’m lookin’ forward to having.

Now for our Sunday musical interlude. (Always wanted to say that.)

This entry was posted on Sunday, June 29th, 2008 at 6:59 pm and is filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Retirement Income, Buying Income Property, Investment Lessons, Capital Growth, BawldGuy Axiom, Palo Alto. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.