Market Value Appreciation of Rental Property

The appreciation of rental property is a big financial benefit that can be a large contributor to your wealth and retirement estate over time. When compared with fine wine and antique cars, well kept rental properties in good locations have a tendency to increase in value as they age. With that being said, the main consequence is that market values of well-kept rental properties (and real estate as a whole) have kept pace with inflation over time. Keeping pace with inflation is one of the key elements for preserving and increasing your wealth in the future.

Inflation and Real Estate Appreciation

For about the past 80 years (since 1926), the average annual rate of inflation has been 3%. Based on this past history, it's reasonable to use the same 3% annual inflation rate for the annual appreciation rate of rental property going forward. But as always, past results do not guarantee future performance.

As an example, let's see how this 3% appreciation rate affects the market value of a Duplex property purchased today at $250,000 over the next twenty years.

As shown by the above chart, with 3% annual appreciation, the market value of the Duplex would have appreciated to roughly $450,000 by the end of the 20-year period. This represents a $200,000 increase in value. If the property was purchased with a 20% down payment of $50,000, then the $200,000 appreciation represents a 400% return on the original $50,000 down payment. And this does not include positive cash flows and income tax savings that would have occurred over those years!

As mentioned above, the 3% appreciation rate is a yearly "average" over the 20-year time frame. Some years it may be less, while other years it could be more depending on the strength of the economy, interest rates and supply / demand for housing. But the bottom line is that the economic pressure of inflation tends to support and push real estate prices higher over the long term.

So that's the magical power which time and inflation have on the value of real estate.

For more in-depth information about the appreciation of rental property, please visit The Landlord's Library book collection. It's a terrific, one-stop source for practical, comprehensive information on the entire subject of residential landlording.

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Investing in Rental Property