The accumulation of assets that will increase value over time is often overlooked. Many choose instead to invest in an item that decreases in value.
A home or other real estate asset will appreciate over time. Each year, property values tend to climb, working exponentially. This continual increase in value should be put to good use.
Exponential Increase
Take the example of a house purchased at $100,000 and increased at a rate of 10% each year. So one year after being bought, it would be worth $110,000, increasing in value by $10,000.
The following year it would increase in value by $11,000, putting it at a value of $121,000 and the next year, if still growing at 10%, the new deal would be $133,100, having increased by $12,100. So over three years, the house, although constantly rising by 10%, is growing by larger and larger amounts each year.
The Rule of Seven
There is a recognised rule in the real estate industry that property values that increase at a rate of 10% each year will close to double in value in seven years. This 10% growth rate is possible in areas that demand real estate, such as capital cities.
Consider the rule of seven and the previously provided example. By continually increasing in value from $100,000 over seven years, the same property will be worth $194,871 by the end of the seventh year. Even if the purchaser of the property had to borrow the total of $100,000, they would have an increased value of nearly $95,000 that isn’t owed to the bank by the end of seven years.
In this way, property purchasing for a long time can increase one’s assets and financial worth. The keen property investor can utilise this $95,000 to borrow against and invest in a second home, again working toward owning a property that will exponentially increase in value over another seven years.
Creating a lot from a Little
Someone looking to buy a house would be hard-pressed to find a decent one at $100,000. However, it is possible to invest in real estate by having at least 10% of the house’s value that one is looking to purchase.
In this way, the home purchases may start with a relatively small sum of money (in comparison to the total value of the bought property) to create one’s property portfolio and begin to generate an asset that will only increase in value over time.
