Posted by GL(ON) on March 11, 2002 at 12:58:23:
Posted by GL(ON) on March 11, 2002 at 12:58:23:
FACT OR FICTION…need some advice - Posted by gregg(fl.)
Posted by gregg(fl.) on March 11, 2002 at 05:39:48:
carlton sheets has said before and printed in his book, that properties appreciate 5% annually. that actually, they compounded at 5% every year. for example, 100,000 house yr #1= $5000, #2=15,300,…yr #10= 320,700. Is this correct? i mean , 5% alone would be very good considering other people are paying for it, plus the tax benefits. according to carlton, 5% has been the norm over the last 25yrs. but is 5% compounded over 30yrs?..in my town homes have gone up 10% every year for the last three, and seems like its going to go up for quite some time which is great, but i know it wont jump up like that forever. SO I GUESS THE QUESTION IS: is it 5% annually or is 5% compounded annually…please help…thank you, gregg…
FACT AND FICTION - Posted by GL(ON)
Posted by GL(ON) on March 11, 2002 at 08:27:18:
The only place properties go up exactly 5% per year is in mathematics text books and real estate courses.
When you do the estimates, yes it is compounded.By the rule of compounding a $50,000 property that gains 5% annually will gain $5000 the first year to become a $55,000 property, then will gain $5500 the next year to become a $60,500 property and so on.
Here is a simple way to figure out how long it will take for value to double. It is called the Rule of 72. Take the interest rate or the appreciation rate, and divide into 72. The result will be how long it takes to double. Example,for 5% inflation: 72 divide by 5 = 14.4 years or 14 years and 3 months.
Now does it seem right and reason that property should double in 14 years and 3 months? I know in my town there was a real estate boom in the 80’s when real estate doubled every 2 or 3 years. Then in 1990-1992 prices crashed by almost a half. In the past 12 years prices have recovered to about where they were in the boom times. So yes, over the past 10 years we probably have averaged about 5 percent, with most of the gain in recent years. If you look over 20 or 50 or 100 years it is probably a fair estimate.
Some places that would be ridiculously low, in others it would be too high. I am told that in Philadelphia prices have hardly moved in the last 10 or 20 years.
If you want to make an estimate, 5% would be a good conservative rule of thumb. But you must remember to look at your local market too. And remember, neither good times nor bad last more than a few years as a rule, when we have a boom it always ends, just when everyone thinks prices will go up forever. And when prices are in a slump that is the time to buy, while prices are low and you have the pick of the market. What you have to recognise is that both conditions are temporary. In some cases an area goes into a permanent depression but that is rare, and you can usuallly tell if there is some big chronic problem that will wreck the economy forever. Other than that the old boom and bust cycle holds good, and fortunes have been made by people who could recognise this, and buy when everyone else was selling, only to sell when everyone else was buying.
Re: FACT OR FICTION…need some advice - Posted by ken in sc
Posted by ken in sc on March 11, 2002 at 07:34:04:
True and false. True, in that probably a NATIONAL avg of 5% compounded would be close. I have read that, too and not from Mr Sheets. However, you must study the market in which you are considering buying, and then make sure you buy below market so at least you have a head start. Because it is never 5% every year. It dips and sways and AVERAGES what it averages. In my town, we have a very diverse economy and there have not been many large swings. Other cities which focus heavy on one particular industry would scare me. Again, here in my town I have studied the data and we have had around 4% compounded for the last 15 years. Not bad. In Charleston, SC they have had over 8%. That is still a county average, one could lose money in a particular neighborhood. I don’t know about the numbers where you live. Like Phil says, you cannot count on inflation or appreciation. You must buy below market to give yourself an edge. But a little studying can let you know what has happened in your area. You can chose where you live and where you buy. Houses are big investments. Think and study where you want to put your money. Then buy below market. Then exchange later if you find you have made a mistake, or can do better in another neighborhood or section of town.
That being said, don’t analyze forever and never get started. Like I said, one can exchange inot a btter house later. But COUNTING on your 5% a year to make it work is guessing, or hoping. Better to buy below market while you keep studying RE. If you buy below market, you are safe.
Re: FACT OR FICTION…need some advice - Posted by Don (Fl)
Posted by Don (Fl) on March 11, 2002 at 07:30:11:
OLD SCHOOL = “Buy real estate and wait”
NEW SCHOOL = “You make your money when you buy real estate, you collect it when you sell.”
Appreciation is “icing on the cake”.
Re: FACT OR FICTION…need some advice - Posted by phil fernandez
Posted by phil fernandez on March 11, 2002 at 06:52:10:
How someone can look in their crystal ball and say what future appreciation will be is beyond me. Nobody knows. Unpredictable events changes in demographics which can tilt the law of supply and demand one way or the other. Can someone predict what the interest rates will look like in 3, 5 or 15 years down the road. Or if the money supply will be tighter than what it is today. Nope.
Using an automatice 5% factor of appreciation is foolish. I do not rely on apprecaition when I’m making a buying decision. Appreciation is just the icing on the cake.
Correction to your example… - Posted by Andrew
Posted by Andrew on March 11, 2002 at 11:48:57:
In your example, you described a 10% annual gain, not 5%. A 5% gain on $50,000 would result in $52,500, and then $55,125, and then…
Just wanted to point that out in case your example caused any confusion.