Appreciation

Buy & Hold Can Provide Big Profits!

Appreciation is a strategy that can be used alone as a performance objective, or in combination with a Cash Flow strategy.

Everyone knows this buzz word! Basically, appreciation occurs once you own a piece of property. If you have timed a market correctly, then the value of the home increases from the amount you paid for it. This creates something called equity.

If you happen to mis-time a market, then the property can depreciate, or decrease in value below what you owe, so before you try this strategy, make darn sure you are in the right market.

Equity is the most powerful leverage an investor can have. The more equity you build (the difference between the fair market value of your home versus the amount owed on it), the more options you have. You can use this equity in several ways:

Sell the Property at a Profit - If you happen to have the capital and you find yourself in a market that is accelerating rapidly, then this may be a case where you can buy the property, hold it for a year (or more, depending on how much money you want to make), and then sell for a tidy profit.

Of course, employing this strategy can pose some risks. The market may stop appreciating and in fact deappreciate. In order to purchase a property in this market, you may have to accept negative cash flow for the period during which you have to hold the property before you can sell it. Or you may not be able to sell for as much as you'd hoped.

However, in most cases, this strategy is fairly successful, and can put a lot of money in your pocket in a short period of time.

Refinance - If the home has appreciated enough, then depending on the loan to value ratio, it's entirely possible for you to pull some of the equity out to buy more property. This is leverage being used at its best.

Think about it. Let's say you put $20,000 down to buy a house for $80,000. Over the next three years it appreciates 15% (5% a year, which in normal markets is quite common in most areas), and is now worth $92,000. Your lender tells you that you are allowed to pull out 20% of the equity, which is an 80% Loan-To-Value (LTV) loan.

In other words, 20% of the $92,000 value, or $18,400, is yours to take back and re-invest as you see fit. In three years you are getting almost all of your initial investment back to turn around and reinvest. Sure, if interest rates are the same now, or possibly higher, than they were when you bought the house, your mortgage payment may go up. But as long as your monthly rent still covers all expenses and your getting cash flow, then this is a very smart move.

Many investors employ this one tactic over and over again to accelerate their wealth.

Security - Often times you may find a property to purchase, but you don't have the down payment funds available to buy it. So instead, you find an individual who can loan you the money. Perhaps the seller himself, or a hard money lender. But before they'll loan you the money, they want to make sure you will repay them. The way they do this is to have you guarantee the loan by giving them the equity in another home you own equal to the amount they are loaning you.

This is quite a simple process of giving the person lending you the money a lien on your property in the amount of the loan. Even though the lien is more than likely in a second position (since your mortgage is always in first position), it still gives them a guarantee that if you fail to pay them back, they will get their money back somehow.

In a situation where you have the potential to make a profitable deal and this is the only way you can get the financing done, it is a great option to have at your disposal.

As you can see, Appreciation can be a excellent real estate investment strategy, and has many, many applications that can propel your investment career forward!