Do You Need Market Appreciation to Build Wealth in Real Estate?

In the fast-moving property markets, investors, homeowners, and speculators

made bundles of money from market increases in price. That’s great. But this boom
period generated a false presumption; that is, without appreciation, profit
opportunities disappear. You might as well put your money into a savings account:
less risk, greater expected return. This simple conclusion misses three other major
sources of real estate profits: Cash Flow, Amortization (Mortgage Payoff), and Value
Creation. Let’s focus on cash flow and mortgage payoff. Mr. A invested in a no-
growth town in India. The property costs Rs 1,00,00,000. He paid Rs 10,00,000 down,
and the seller financed the balance over 10 years. This older (or say it aged)
apartment building did not appreciate. After 12 years, he sold it for Rs 1,00,00,000 the
same price he had paid.
To anyone who only judges returns by increases in price, it would seem that
Mr. A’s apartment building proved to be a lousy investment. Instead, a closer look at
the numbers actually reveals a bonanza. After operating expenses and debt service,
that property netted Rs 1,20,000 a year in after-tax cash flow. Just in terms of CASH
FLOW, he earned an annual return of 12 percent on his Rs 10,00,000 cash invested. In
addition, that Rs 10,00,000 down payment grew to a total equity of Rs 1,00,00,000
(recall, he paid the note off at year 10). Without appreciation, without value-creating
improvements, Mr. A earned a total annual rate of return in excess of 13 percent.

!!!! Stunned !!!!

Can you still buy such properties? Yes, even today you can find similarly
attractive deals in many parts of India and other areas that lie outside those more
widely publicized, high-priced cities and neighborhoods.

Never focus only on market price increases. Just as the “dogs of the Dow”
sometimes outperform the Microsofts and Amazons, so too can various low-to-
moderate income, out-of-favor, no, or slow growth property markets offer attractive
yields. The entrepreneur knows that he or she can achieve strong returns even in
those times or areas where price increases take a long vacation.

Regards,

Chandan Mundhra
Ultra Rich Organisation
India