When investing in real estate, it’s important to consider the effects of appreciation and inflation. In this article, we’ll discuss how appreciation and inflation impact long-term real estate investment and how you can benefit from a buy-and-hold real estate strategy. First, let’s touch on a few reasons why real estate is our favorite asset class to invest in.
- Tax benefits
- Cash flow
- Appreciation potential
- Inflation proof
- Limited amount of real estate
Now, let’s discuss inflation and appreciation in real estate.
Inflation in Real Estate
Economists explain inflation as a sustained increase in prices for services and goods, which includes rent, real estate prices, stock, wages, and more. Unlike investment accounts, real estate investments offer a greater return. Just as the value of the property rises with inflation, the amount tenants pay in rent can be increased over time. This allows real estate investors to keep up with the rise in prices across the economy.
What Causes Inflation?
Inflation is caused by the devaluation of currency over a period of time. Devaluation of currency is caused by a variety of factors, including reduction of interest rates, demographic changes, and more. Since 1913, U.S. inflation has averaged about 3.2% a year.
Appreciation in Real Estate
Appreciation refers to an increase in the value of an asset over time. Due to economic growth, limited housing, demographic changes, or other additional reasons, real estate prices are almost guaranteed to go up in the long run. For example, if you purchase a property for $200,000 in today’s market, you may be able to sell for roughly $300,000 in 10 or 15 years. However, there’s no failsafe way to predict housing market trends. Your home’s value may decrease due to crime sprees, job losses, destructive weather events, vacant homes, a spike in property tax rates, etc.
How Location Impacts Appreciation
When determining real estate appreciation, consider the location. Location refers to the city, state, neighborhood, and the exact location in the neighborhood. Locations that are in higher demand are more likely to cause real estate appreciation in the future. When identifying emerging markets, it’s important to evaluate job creation, population growth, government planning, affordability, absorption rate, and vacancy rate. Austin, Texas is one city that has seen tremendous growth in the real estate market and will most likely continue growing.
The Economy and Appreciation
Although you can control the location and aesthetic of your real estate property, there are other aspects of real estate appreciation that are out of our control. The economy is one of them. When the economy is doing well, like it currently is, the demand for housing will increase, which means real estate prices will go up.
How Inflation Affects Real Estate Appreciation
Inflation is one of the most important factors in real estate appreciation. In fact, there is a direct correlation between inflation, demand, and appreciation. So, when the price of your home goes up over time, is it due to home appreciation or inflation?
Here’s a quick example by Bigger Pockets of how both appreciation and inflation will impact your real-estate investment over a 20 year period.
“In real estate, if you put 15% down to buy a property, you get a return not only on that 15% but also the other 85% because of appreciation. Let’s say you put 15% down ($50,000) on a $330,000 investment property and appreciation stays at 5% for 20 years. Your property would be worth $876,000. If you include inflation loss, you will be left with a $471,000 property in today’s dollar value.”
The Bottom Line
Bottom line, high rates of inflation and appreciation are beneficial for property owners in Austin and across the nation.
Why Choose Keyrenter Property Management in Austin
Investing in real estate requires a lot of research, knowledge, and expertise in order to gain a profit, so it’s important to consult with a property manager in Austin. At Keyrenter Property Management Austin, we view your investment as our own. Our team never cuts corners when it comes to property management services. We use a combination of educational tools, cutting-edge technological resources, and ongoing training to ensure our team can provide the best service in the industry. We will maintain your property to ensure it can deliver investment results for years to come.