We previously looked at the main reason I invest in real estate:
Rental property cash flow is king.
With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses.
For my money, cash flow from rental properties is the best way to pay for those immediate expenses.
What if you don’t need your cash flow to cover your immediate life expenses? Maybe you have a full-time job that provides more than enough.
That’s even better. There’s no rule that says you have to spend your cash flow.
If your present day expenses are already covered, you can use your cash flow to fund additional investments. That might mean buying another rental property or investing in another asset class, like stocks.
The point is cash flow gives you options. Having options is never a bad thing, right?
That’s why cash flow is the number one reason I invest in real estate.
However, cash flow is not the only reason.
I also invest in real estate to generate long-term wealth for me and my family.
I am a buy-and-hold real estate investor.
That means when I buy a property, I intend on keeping it for many years. Circumstances may change, of course, but my intention is to hold property for a minimum of ten years.
The reason I buy-and-hold for the long term leads us to the next major reason I invest in real estate:
Appreciation.
While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits. Appreciation is how I will generate long-term wealth for my family through real estate.
Today, I want to talk about what appreciation is and how it can significantly improve your net worth over time.
Let’s dive in.
What is appreciation in real estate?
Appreciation simply refers to the gradual increase in a property’s value over time.
For example, if you buy a property for $500,000, and some years later it’s valued at $750,000, your property has appreciated by $250,000.
That means through appreciation, your net worth has increased by $250,000.
Except for when you’ve forced appreciation (we’ll discuss below), you have earned that money through appreciation by doing very little. All you have to do is make your monthly mortgage payments, and let the market do the rest.
This is exactly how many Americans generate significant wealth over time.
How to target properties with a strong likelihood of appreciating is beyond the scope of this post. I’ll soon share with you my criteria, but there’s no one way to do it.
Entire websites and books have explored this topic. If I were just starting out, I would spend a lot of time on BiggerPockets.com.
For that matter, even as an experienced investor, I still spend a lot of time on BiggerPockets.
For now, remember one main point when it comes to appreciation:
Appreciation takes time.
Successful real estate investors know that appreciation takes time.
I’m not talking about speculators or gamblers. I’m talking about people who are interested in building long-term wealth for their families.
To build long-term wealth through real estate, you need to remember this main rule about appreciation.
It’s so important, it’s worth repeating:
If you can hold a property for years or even decades, you have a really good chance of that asset being worth significantly more than when you paid for it.
Your property may not appreciate at the same rate every year. Some years, your property may even lose value. That’s OK because you’re in it for the long run.
The hard part is just holding on long enough to realize the benefit of appreciation.
In this way, investing in real estate is like investing in stocks.
How is investing in real estate like investing in stocks?
Many of the same fundamentals apply to investing in real estate as to the stock market.
We just mentioned one of the biggest keys with either asset: the longer you hold that asset, the more that asset should eventually be worth.
With stocks, we’ve already spent a lot of time in the blog discussing why you need to invest early and often.
For more information on investing in stocks, you can read a variety of posts here.
When you invest in stocks early and often, you can benefit from compound interest and safely ride out down market cycles. The stock market does not always go up every year, but given enough time, it does always go up.
In large part, the same is true when you invest in real estate.
If you buy good properties in good markets, given enough time, your property should appreciate in value. Like with stocks, the key is your ability to hold on and ride out down market cycles.
Want to know the secret to riding out down markets?
Cash flow.
You saw that one coming, didn’t you?
Cash flow will help you ride out market cycles and benefit from appreciation.
When you own strong, cash flowing rental properties, the cash flow covers all the expenses.
That means you can stay patient in down markets because holding that property is not costing you any money.
To take it a step further, as long as your property is cash flowing, you can hold it for decades and generate massive wealth through appreciation.
Cash flow and appreciation working together is a powerful force. You can see why real estate investors get so excited about their investments.
When a property is performing, the cash flow allows an investor to hold that property indefinitely. During that time, the property becomes more valuable through appreciation.
It’s a beautiful partnership.
What is forced appreciation?
I mentioned earlier that there is one other form of appreciation worth talking about here: forced appreciation.
Forced appreciation is when you improve your property in such a way that it increases in value.
Common examples may include remodeling the kitchen or bathrooms or adding another bedroom. When you make these enhancements to your property, your property should increase in value.
This is what house flippers do. They buy a property in need of some work, do the improvements, and then aim to sell that property for a profit.
It’s not a strategy that I personally use, but it has worked for many people for many years.
The thing is, forced appreciation is not just for house flippers or investors hoping to realize a quick profit.
When done correctly, forced appreciation is another way to make money over the long-term for buy and hold investors, like me.
For example, in one of our rental buildings, we added in-unit washers and dryers. By doing so, our units now command a higher monthly rent, which in turn increases the value of the property.
As a final point, forced appreciation is one way investing in real estate is different from investing in stocks.
When you buy real estate, you are in control. You decide what improvements to make and not to make. Many real estate investors love having this type of control over their assets.
By contrast, when you own stock in a company, there is very little (if anything) you can do to impact how that company is run. Unless you have boatloads of stock in a particular company, you’re essentially just along for the ride until you sell your stock.
What do you think about generating long-term wealth through appreciation?
Now you know two of my favorite reasons for investing in real estate: cash flow and appreciation.
Have you invested in real estate and benefited from appreciation?
Did you force appreciation or hang tight and let the market do it’s thing?
Let us know in the comments below!
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