But appreciation itself is not the entire answer. For instance, investors should be able to reasonably predict a minimum of 15% rate on their investment before making the decision to buy or to continue holding an investment. The question then becomes at what rate of appreciation will my investment continue to provide me with a minimum anticipated 15% return.

For instance, let's suppose you own a $150,000 house free and clear, that rents for $13,500 per year and that it experiences annual expenses of $3,000, including vacancy, your net income is $10,500. This is an annual return of 7%. If during this year it has appreciated 6% during this period then you could say that you had earned approximately 13% before taxes.

However, if you were to have refinanced the house a year ago (when it was worth $141,500) for 70%, or $99,000, your mortgage payments would total approximately $7,900. This would have decreased your cash flow from $10,500 to $2,600. This $2,600 added to your appreciation would have resulted in a return of approximately $11,100. However, because of your decreased down payment, your equity has now decreased from $141,500 to $42,500, which results in a percentage increase of 26% ($11,100 / $42,500).

Of course, you also had $99,000 in proceeds from your refinance to invest. Investing them on the same basis as your original house, you would have been able to purchase two additional houses with market values of $141,500 each. (In this example, to make it simple, $14,000 in investment proceeds were not considered to be reinvested. Perhaps this money was spent for closing costs and fix-up expenses.) Thus, a year later, you would now

have three properties totaling $450,000 with cash flow of $7,800 per year and appreciation of $25,500 ($8,500 per property) for total appreciation and cash flow of $33,300.

The comparison, after just one-year, would be:

This is only part of the story, of course. It really gets exciting as these figures are extended for additional years. For instance, the appreciation on $450,000 for 10 years at 6% per year is $805,900 while on $150,000 it is $268,600. That's an increase of $552,300. That's an increase of a half million dollars by making one change in financing! Imagine what the results would be if you refinanced and reinvested just one additional time!

When investing in single family homes, appreciation is the essential, critical ingredient required to forge an investment success. Fortunately, when it comes to appreciation, you are not at the whims of the market place. Appreciation can be anticipated, planned for and created.

The anticipation of, and planning for, appreciation is the art of understanding cause and effect. The creation of appreciation as it relates to individual properties is the science of property management.

The blending of these two factors is the fairy dust of real estate investment. When they are laced with timing and persistence, and liberally sprinkled upon well located, "demand" properties, the resulting profits are magical indeed. -

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com