Over the last 2 years, residential real estate in many markets has gone crazy. I’ve been in the mortgage industry and real estate market for more than 21 years, and it is hard to believe how expensive real estate is getting now in 2022 and how fast values have gone up.
At the beginning of 2021, I was looking for a new home for me and my children and I experienced a situation that seemed unreal. There were over 20 offers on every single home listed and the final sales prices on homes were typically anywhere from $20,000 to $100,000 over the list price. I made offers on homes and offered to pay $30,000 over list price, and never got an offer accepted. In my market, it seemed like this lasted from January of 2021 to at least September/October of 2021. I think buyers got discouraged and gave up and finally the demand slowed down some and the supply of homes for sale went higher. This perfect storm in 2021 of real estate value appreciation, was most likely attributed to a few different factors.
First of all, there was a lot of pent-up demand and in 2020 with Covid 19, buyers were not buying and waiting till the situation got better. Once the situation was better with the pandemic, the buyers hit the market in a bad way.
Secondly, the normal movement of the population from job to job and state to state was not happening as it usually does. The normal population that usually takes different jobs or moves was not happening and so the normal supply of homes dried up to a point that I had never seen.
Lastly, the normal supply of new homes was also not being built. Supply chain issues had slowed down the construction of new homes so the normal increase in hosing units from new construction had also slowed down. Limited supply and crazy demand took real estate values rocketing in price. Sellers could raise priced and then have multiple offers that further drove the price of home up.
Over time, real estate has always been a good investment. We did have a decline in real estate values from 2008 to 2012 when the market bottom, but values are much higher now than before the last peak in 2008. Holding real estate has proven to be a wealth builder and owning real estate has been the best contributor to generational wealth. Hence, it is one of the biggest aspects of the American Dream.
Real Estate Price Appreciation
I’ve already been discussing supply and demand and how real estate values increase over time. But the best thing about real estate and its appreciation is LEVERAGE! With mortgage financing, we can buy expensive real estate that we don’t have all the money to pay for and just put down a 5 to 25% down payment and use a mortgage for the rest. We can buy a home for $500,000 with just a $25,000 down payment and maybe a bit more for closing costs, but then we can own the home and take advantage of our higher priced asset. So instead of our $25,000 asset appreciating 10% to $27,500, the $500,000 home can appreciate 10% to $550,000 and we’ve just made $50,000 on our $25,000 investment instead of just $2500. That’s a pretty big difference, huge!! This is the biggest benefit of owning real estate.
Mortgage Principal Pay Down
The second way that we can gain equity in real estate is through the pay down of your mortgage payment, or better yet, the pay down of your mortgage payment by someone else if you have a rental property. The rich get rich by using other people’s money and in a small way we can also participate in this proven strategy by using the money of our renters to pay down our mortgages. Each month your mortgage payment includes principal and interest (usually more interest than principal). I have my home and 3 rental properties at this point. And between the 4 of them, I gain $4000 plus of equity each month in all of my properties from the principal paydown on the mortgages. I have 4 large mortgages on these properties, and it will take a lot of time (20 to 25 years) to pay them off completely, but each month I gain more equity and wealth from each of these mortgages being paid down. This again is leverage. Leveraging the mortgage payment and leveraging the rental income from your tenants.
As we’ve discussed in other articles, the great thing about owning real estate is the passive income, along with passive equity appreciation and passive mortgage pay down. The passive income potential and leveraging that occurs when you own real estate are two critical advantages in wealth building of real estate. But real estate is also a game of patience and timing.
If you want to start a side business where you can grow your passive income faster than real estate and also leverage the efforts of other people to grow your passive income, then jump on a 25 minute call with our team so we can explain this technology based business that can help change your life in 2022.
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