What is the great principle by which wealth is created? Leverage.
What does this mean? Just as a lever allows a small weight to move a large one, it is the ability, with investment, to create a large return from a small amount invested.
Real estate can be mortgaged and it can be rented. Often the rent will pay not only the cost of the mortgage but other expenses such as property taxes, insurance and the cost of management. This enables an investor to own a home on a small amount down, such as 20 percent, and obtain the return on the full value of the property. That is leverage.
If you borrow 80 percent of an investment property’s value, and the market appreciates 10 percent in a year you will have gained a 50-percent return on your investment. Lake County since 2011 has done better than this every year.
In 2015, average sale prices for homes in Lake County rose 17.89 percent over the year before, according to the Lake County Multiple Listing Service. This means if you bought a home in 2014 with 20 percent down, on average you will have obtained a return of 89.45 percent on your initial investment a year later. In fact the average home sale price in Lake County has risen 72 percent since 2011, from $123,299 to $212,128, but someone who bought a property in 2011 with 20 percent down, will have increased their investment by 360 percent during five years, or an average of 72 percent for each of those five years. We have many clients have made just these kind of gains over this period, and are very happy for it, and this appreciation was predictable because how far below replacement cost homes were selling for. What other investment do you know, that can offer this kind of return?
Especially for an essential commodity. Every one either owns or rents a home (except for the few that are homeless). Every home has a new replacement cost, and so the value of homes, should always be reflected by the cost of replacement, and therefore is normally relatively predictable, except for dramatic financial events such as happened in 2008, which turned our sense of value upside now, but even so, has now begun to return to a reflection of the cost of replacement.
Now there are other considerations such as what it takes to liquidate your investment, and there is the skill of managing real estate, but as a dependable longer-term investment, it is hard to beat.
Timothy Toye is a real estate broker in Lake County. He can be reached at (707) 928-5912 or timothy@teamtoye.com. Visit www.teamtoye.com for more information.
