Equity and Appreciation In Real Estate (Explained)

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What's up guys, James here and in today's video, we're gonna be talking about equity and appreciation and the role that they play in short term rental investing. Now the spotlight often gets stolen in short term rental investing by cashflow, because obviously cashflow is one of the main number one reasons why we invest in short term rentals because they cashflow so incredibly well and can replace your nine to five income very quickly with even as little as just one property. Don't get me wrong cash flow is absolutely amazing, and is one of the biggest reasons why I love short term rental investing. But there are two other ways that we short term rental investors earn our return on investment. And that is through equity through paying down the principal on the mortgage and building up equity in the property. And through appreciation, the natural growth and the value of our underlying asset, that property that real estate that we can look out, we can touch we can go and visit and they deserve some more attention. So before we give them that attention, I just want to remind you do check out the links in the description down below, they are going to teach you how to invest successfully in short term rentals. So do it, click the buttons, click the links there in the description there, they're the trainings are completely free, I don't charge you anything to access the trainings, you can do that completely free, and it's gonna show you step by step how to invest successfully in short term rental properties, it's going to show you how to avoid the mistakes that I made, it's going to show you how to make sure that their success we're going to give you I'm going to hand you I'm not literally had you obviously I'm going to email it to you. But I'm going to give you an analysis spreadsheet so you can analyze deals and see exactly if they make sense or not how much return you're going to get on your investment, it's going to break it down cash on cash, equity, equity, return appreciation, it's gonna show you all that stuff. So again, check out the link in description down below to get access to all that completely free. You want to it's also free clicking the like button, do that while you're here. I don't know why I'm talking like this. But I like it kind of fun, I'm having a good time, hit the subscribe button, there's another button there, hit all the buttons on the screen, hit the like button, hit the subscribe button, check out the link in description down below. It's all gonna help me out a lot. And if you want to help me out, or you just want to help help out then do it all. Okay, awesome.
Let's start talking like this. And let's go back to talking about equity and appreciation. So the first one here is equity. Equity is basically what you're building in terms of like retained earnings, essentially, you're building equity in your property. Retained earnings is probably not really the right term to use there. But essentially, the way to look at it is that as you if you own your property, let's say you have 20% down well, you know, every single month, you pay a mortgage payment on the remaining 80% balance. And every single month, a big chunk of that is initially especially going to be going towards interest. And that just disappears, that's just going to your lender that's paying for their livelihood, that's making them money, right. And that's all well and good because our tenants are the ones paying for it not us, right? You know, if you're paying for it, that is not great. But if your tenants are paying and your guests are the ones paying for it, all good, all gravy, but another chunk of that money is actually going into essentially your bank account, much of that money that you're paying towards your mortgage is actually going towards paying off the loan that you have the actual principal on the loan that you have on the property. So it's essentially going into a little forced savings account where you can't access it right now you have to either use it a home equity line of credit, or refinance or sell the property to be able to access it. But as long as the property obviously maintains its value, you then have this additional equity, you own a larger and larger and larger chunk. So instead of owning 20%, when you start or maybe you put 10% down something like that, you want a larger and larger percentage of that property as time goes on, without you actually having to pay that mortgage bill because your guests are paying it for you. And that's really fantastic. And initially, it's going to get you on like a $500,000 property, maybe you're getting 10 $12,000 a year in just principle pay down on the mortgage. But then as you go longer into the mortgage, typically the way mortgage payments are structured to schedule for payments is that more interest is paid up front, less interest in more principal is paid on the long tail. So as time goes on every year going to be paying off more and more principal, less and less interest on your mortgage. So that means you're gonna be making more money in this kind of forced savings account. And so although it's not tangible, like you can't actually access it, you can't go and touch it, you can't go and spend it, it is still there. And so that's largely why we don't want to bank on it is because if the property value goes down, you may not be able to access in the short term until the property value goes back up. But it is there it is real. And so it is still a really great additional kind of cherry on top of your investing. And so you can also calculate that figure out exactly what it's going to be and then add that to your cash on cash ROI and your appreciation try to get your total ROI. Speaking of appreciation, ROI that's the other way. The third way that you're going to make money on real estate investing and short term rental investing falls into that category it is, of course, real estate investing. Now appreciation ROI, there's two different types of appreciation, there's forced appreciation and there's natural appreciation. One, you have more control over forced one, right, because you're the one that's actually forcing the appreciation on the property. So what that means is basically taking this $5,000 home and turning it into a $700,000 home. So now you have an extra $200,000. If you were to go to sell the property, refinance the property, or, or get a home equity line of credit, you can access different portions of that, obviously, the only way to access all of that additional is to sell the property, but you can access different portions of it through home equity line of credits, through refinances. I'm not going to get into all that detail in this video, but just know that it is there. So how do you do that? How do you take a $500,000 property and turn it into a $700,000 property? Well, it's probably gonna require you to invest some of your money, as well as some of your strategy into making the right renovations. So forcing appreciation on a long term rental property essentially just comes down to if it's a commercial asset, getting that property to yield more money, commercial assets, meaning long term rental multifamily properties and other commercial types. There's other other commercial assets as well. But basically, they're valued based on their cash flow, if you've ever heard the term cap rate, it's a calculation to figure out what the value of property is based on or it's that the relationship between the amount of income that a property generates in a year and the value of that property, right. And so there is a direct relationship there. But in short term rental investing, there isn't so much in short term rental investing, it's really more about the value of the actual property itself, it from an a more subjective point of view, so that you want to think about, you know, a nice kitchen, a nice bathroom, it's not about how much income does the property generate? Now, I think that we're going to start to see times in the future where these assets are actually valued based on their incomes. And you certainly can get larger assets like multifamily, like you know, boutique hotel type deal that is going to be valued based on its income. But for the most part right now, the majority of the properties you're gonna be investing in, because you can't get lending on them in most areas based on the income getting you can in some areas. So that's why we're going to start progressing towards them being valued off of their income. But for the most part, they're going to be about value the same way any other single family home would be just looking at the actual home looking at comps in the area, etc. And so what we want to do is do strategic renovations, they're going to make that property more valuable. So think about redoing the kitchen, getting rid of that blue carpeting, doing some bathrooms. And if you let's say invest 20,000 $30,000, in the right areas in the home, make it more desirable for everyone, I'm not talking about painting the bedrooms, at you know, your favorite shade of blue, I'm talking about actioning strategic renovations that the market is going to deem valuable, then you can force appreciation that is greater than the investment you've made. So maybe you invest 20,000, and lift the value of the property by 60,000, well, then you basically have created $40,000 worth of value there. And so that's forced appreciation. Now, the other type of appreciation is natural appreciation, that is when the property's value goes up, because of theory does just because the market overall is rising, right? Things get more expensive things in flight. And so there's gonna be natural appreciation and a lot of markets. Now, this is going to vary, this is a bit more of a lottery ticket bit more of a wildcard. So you want to invest in areas that you believe are stable, where the property is at least going to retain its value in a long term, and not lose value, obviously. But as far as which markets are really going to shoot off and which ones aren't. There's a lot more guesswork that goes into that. And frankly, you have to look way more in detail. There are people that can predict the appreciation market and look at a whole bunch of different factors from immigration policy to inflow of new immigrants to you know, population growth, all of these different factors and figure out which areas are going to grow and are going to naturally appreciate by larger margins. And then there are a bunch of people that just place bets, and they're basically just going into casino, right? They don't have any clue what they're doing. They're just going oh, well, it's been going up in the past. So it'll go up in the future. Now the ladder, not a really great strategy, the former if you're one of those people who can look at different markets, all kinds of different economic drivers and figure out where population growth is going to be headed in the next 1020 years and start investing there and see your property values rise, amazing, more power to you. That is not the type of investing we're doing because that is much more speculative. It's based on what we think is going to happen in the future. And as opposed to what is happening right now. That's one of the big benefits of short term rental investing is that we get the certainty of knowing that this investment does make sense right now we can base that off of how the property is going to perform right here right now. So natural appreciation. Yes, you can figure out ways to determine and kind of try to predict with relative certainty where the demand is going to go and where the appreciation is going to go as a result. But generally speaking, you want to be conservative with your estimates, and you want to assume maybe 2% per year and appreciation and a standard market, if you assume that you're probably not going to go wrong, yes, there might be dips down where the property value is going to decrease. But if you hold on to the property long term, then statistically speaking, if you just look at all the historical numbers, if you hold on to it for long enough, you'll be able to sell it at a profit where the property is appreciated by 2% or more per year, now, again, in a lot of markets is going to be way more substantial. 2% is very, very conservative for for a lot of markets. That's the way I like to look at, I like to say ultra conservative, and that's basically just the cherry on top of the cherry on top of your sundae of short term rental investing is that without really having to do anything, but hold on to the property, its value goes up over time. And, you know, you get to sell it at a profit later on down the road, or you get to refinance it, or you get to take out a home equity line of credit to tap into some of that equity. So those are the two different ways in addition to cash flow that you can earn a return on your investment from short term rental investing. And those in my opinion, just take this really good investment and make it absolutely great, absolutely fantastic. Honestly, I would still be investing in short term rental properties, even if they just yield the cash flow and stay dead even on equity. Because there's such a great investment. The cash flow is so strong, but the fact that we've got equity to rely on the fact that we've got an appreciation rely on makes it even better and can give us a cool backup plan. You know, if you do a renovation project on your property and lift the value of the property, well then you've got a real good backup plan.
If short term rentals ever don't work out so well you can sell the property at a really nice profit. So there's all kinds of ways to combine different strategies to make it an incredible return on your investment. I've talked about that a bunch on this channel. If you want to learn more about it, check out the links in the description down below. If you want to learn more overall about how to invest successfully in short term rental properties from start to finish. Make sure you check out the link in description down below for that free training. Again, keyword they're free. Check it out, nothing to lose everything again. Check it out link in description down below. Hit the like button, hit the subscribe button and I'll see you in the next video.