Authored by Harold Hofer, CEO and Co-Founder of Elevate Money.
One hundred times more is what my mom’s house just sold for in comparison to what she paid for it 50 years ago. The house didn’t double or triple in value, it went up 100x from its original value.
To be clear, our home was bought for $32,500 in the late 1960s and we sold it for $3,250,000 just a couple of years ago. Two more zeroes.
My family immigrated to the States when I was four years old and we began our life here living in apartments. After seven years of living frugally, our dream of homeownership was finally realized in the form of a 1,500-square-foot, 2-bed, 1-bath home built way back in the 1920s. But it wasn’t the age of the house, dated appliances, or curling wallpaper I remember most - it was the backyard. A patch of green that was our very own! No more playing in an alley or on a busy street where the only green you saw was in the cracks on the sidewalk. This space was ours.
As luck would have it, the house was located in Santa Monica on the western edge of Los Angeles. Now no one at the time could have anticipated this, but within a few years, the home prices in our beach town skyrocketed and continued to do so in the decades that followed.
Buying a house provided our family with physical security, and in the end, also gave my mom financial security.
Needless to say, 100x is an incredible investment return! And though not all places will become the next hip place to live, it does showcase how real estate can potentially appreciate consistently and considerably over time.
Now you may think how lucky we got, or that this could never happen again in today’s economy; that there is no way a house or any other piece of real estate could go up in value that much again. But I’m here to show you that this big win isn’t as out of reach as it may seem.
Two more zeros, hmmm. I wondered to myself, what annual rate of return would it take to grow anything 100x in 50 years? I went ahead and did the math, and the answer is 9.25% (with monthly compounding) or 9.65% (annual compounding).
You can try the Elevate Money dividend calculator and see this for yourself (set the initial investment to $32,500, the dividend yield to 9.25%, and turn on Dividend Reinvestment). Then view the return over 50 years.
Honestly, given that the appreciation on my parent's house was so huge, I would have thought the annualized returns would need to be much higher to capture 100x in 50 years. What’s even more interesting is that this annual return was realized solely from capital appreciation.
Real estate ownership typically has two components of investment return: income (rental profits) plus capital appreciation (increase in value). My mom’s house was only the latter, meaning the 100x return was not supplemented by someone renting the house from her. She lived in that house for all 50 years.
When you factor in both income and capital appreciation, and when you consider the magnifying effect of mortgage financing, achieving a 9.25% - 9.65% annual return on a real estate investment is really not that crazy.
With some research, you can find that the annual inflation rate is around 3.5%¹, and dividends for real estate investments historically have been around 6.5%² within a diversified portfolio. This 10% total annual return makes the 100x return more believable, even with today’s real estate prices being much higher than they were 50 years ago!
And while not everyone can afford an entire property at this moment, through crowdfunding you can let your money potentially work for you in this same way.
Check us out at Elevate.Money to learn about the real estate potential that is available to you with just a few clicks at a very modest cost. Breaking the barriers to entry and giving you power, one investment at a time, starting with as little as $100.
- WorldData.info From 1979 to 2020 the average inflation rate was 3.5% per year.
- Millionacres.com Diversified REIT Annualized Total Return from 1994-2020 is 6.8%
This article was originally published on Elevate.Money.
Image sourced from Shutterstock
This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This content contains sponsored advertising content and is for informational purposes only and not intended to be investing advice.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.