When it comes to property, while rents provide the cash flow to cover the mortgages, the real wealth comes from capital gains.
If you invest in shares, you will understand this. Although you receive dividends from time to time, it’s the share price appreciation which creates the bulk of your wealth. The case in point is Berkshire Hathaway, run by billionaire Warren Buffett. Berkshire Hathaway’s class A share trades for over $200,000 per share. In 1960’s, you could buy the same share for less than $30. Just like shares, the real wealth from property comes from capital appreciation.
That’s why the buy and hold strategy is very popular among property investors in NZ. On average, Auckland’s house prices doubles every 10 years, Due to the effect of compounding, a property bought for $50,000 in 1960 will appreciate as follows:
- If you had sold the property in 1980, you would have missed out on another $1.4 million over the next 30 years.
- If you need money: instead of selling the property, refinance the mortgage. In those days, you can refinance up to 90% of the property’s value.
- That’s the law of compounding: The longer you hold the property, the more the value appreciates. Hold the property for 10 years, it doubles. After 20 years, it has quadrupled its original value. After 30 years, its value will be 8 times the purchase price. This is why the buy and hold strategy works. When you got a property that appreciates, time is your friend.