LEVERAGE is a word that real estate agents and other experts throw around, and prospective buyers smile and nod. But do they really "get"it? I don't think so, and that's why I put together a hand-out several years ago, featuring these charts (along with a prominent disclaimer that they are for illustration purposes only and not a prediction or guarantee).
In today's market, as real estate values are going down and prospective buyers are wondering if $10,000 invested in a home is really a good idea, I think it's more important than ever to explain leverage - and to put it in the context of 10 years. All the narrative that follows is not in the handout, it is how I explain it, as we go over these charts and a third one illustrating a rent/own comparison.
While I have no crystal ball, and certainly can't make any predictions or guarantees, most people agree that real estate goes in cycles - with ups and downs in the market. Over a 10-year period, measuring from start to finish, it's reasonable to anticipate that real estate values will go up, even though there may be some downs during the intervening years - such as we're experiencing right now.
For the sake of this example, let's use 5% as the average appreciation or inflation rate, and assume the same appreciation rate for $10,000 invested in a home compared to $10,000 plopped into a savings account.
Since it is the asset which appreciates (not the cash investment itself), the $10,000 invested in a home has the potential for much higher return, based upon compounding of the asset's value.
Naysayers will point out this doesn't take into account the cost of selling that home before you can realize any return on investment.
That's true, but it also doesn't take into account the equity growth through 10 years of mortgage payments; if you're going to count the cost of sale, you gotta count the equity growth, as well.
You could carry this to another step, comparing the cost of owning vs. the cost of renting, but I'll save that for another day. I actually do use the three charts together on a single page.
So much of today's training for real estate agents is based upon the use of technology for marketing.
In the "old days" we relied more upon hard-core knowledge such as this - solid information shared with consumers. The handout I copied this from was created on an old-fashioned typewriter, and the only graphical interest was red headings - possible because I had a super-upgraded typewriter with two colors of ribbon. Yet it got the job done, because it was information that consumers wanted.
May I suggest that today's consumers are more educated and detail-oriented than ever, and they "get" the power of leverage when it is explained to them. It could be the very thing that gives someone the confidence to buy a home instead of renting.
_______________
_______________
For more information about Leverage and all things real estate, contact Margaret Woda, RE/MAX Vision. (mwoda@remax.net)
Comments(39)