It Is Common For Real Estate To Increase 6 Percent In A Year

Category: Finance, Real Estate.

At the current time, it s no secret the price of real estate has stopped increasing and has started to fall in most parts of the country. In the coming years, many people will be making money because they bought into this real estate market downturn.

Though this may be bad news for people who were planning on their homes going up in price quickly, a dip in price is good news for those looking to invest in real estate. Making a lot of money in real estate is of course, easier said than done, but it is certainly not unprecedented. The first step in gaining this knowledge is an understanding of the rule of 7 The Rule of 72. The first step on the road to riches is to gain the understanding of the tried- and- true theory of making money in real estate. The rule of 72 helps us understand the effects of compounding interest over longer periods of time. For instance, if you had$ 10, 000 in the bank and it was earning six percent per year, you would divide 72 by 6 to find out how long it would take the$ 10, 000 to double into$ 20, 00 The answer is, 1So, of course, if you were to invest for a very long period of time, 36 years, for instance.

It states, compounding interest will double the price of a commodity in the number of years of 72 divided by the yearly interest rate. Your$ 10, 000 investment would turn into$ 20, 000 in 12 years, $40, 000 in 24 years, and$ 80, 000 in 36 years. In fact, this would be a relatively slow market. It is common for real estate to increase 6 percent in a year. The price of realty doesn t always go up, but when there is a hot market, it is not uncommon to see real estate increase by 20 to 30 percent in one year. Those types of gains are an aberration. Since the market is not always hot, it doesn t make sense to use the rule of 72 to calculate for enormous gains like 30 percent.

However, since the 50s real estate has increased, by an average, in some areas of 8 percent. If a commodity increases by 2 percent per year, the rule of 72 tells us that its price will double every 10 years. 72 divided by 2 is 1So, you can see that over the long haul it is smart to be invested in real estate all the time. For simplicity reasons however, lets use the figure of 2 percent. Leverage. To get on the fast track to wealth, you must incorporate leverage. Simply doubling your money every 10 years will not put you on the fast track to wealth. With leverage you control a large amount of worth, while only having invested a small amount of money.

If you are able to put down 20 percent on a$ 200, you will have, 000 property invested$ 40, 00If the price of that property doubles in the next 10 years, which the rule of 72 tells us it will at a yearly interest rate of 2 percent, the price of the property will be worth$ 400, 000 after the 10 year period. Here s how leverage works in real estate. If you had been able to rent out the property with your tenants making the monthly mortgage payments, as well as paying your taxes and insurance, you will have made$ 200, 000 with your$ 40, 000 investment. If your mortgage happened to have been an interest only mortgage, the property would never be paid off, but your monthly payment would have been low enough to have your tenants paying the mortgage payments each month without you suffering a negative cash flow. This is leverage at work because the rule of 72 should have doubled your$ 40, 000, but you actually made$ 200, 000 because of the leverage your mortgage, combined with renting gave you. At this point, you could sell the property and receive$ 200, 000 minus probably, $5, 000 to$ 6, 000 for expenses, at closing. Of course, as a real estate investor, your next move would be to use your$ 235, 000 to make down payments on other properties.

Plus you will also get back your original$ 40, 000 down payment. You can see how a person could use the rule of 72 and leverage over and over again to become very wealthy. It is a proven theory that has worked countless times. This is not a far- fetched hypothesis. For many people, the trick is to find the original down payment he/ she will need to get started. However, it will be the topic for another discussion. Aside from the rule of 72 and a thorough understanding of how leverage works, knowing how to get started with little or no money is the next biggest key to success in real estate investing.

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