Assessing the Capital Growth of your Real Estate Investment

Written by Monique Wakelin for the ‘Take Control: How Home Equity puts you in the driver’s seat’ article published in API magazine – December 2006 issue and this features the third part of this useful article.

Investors often ask how to measure the growth in the equity they control and how to access the capital growth achieved. Firstly, find out how much your property is worth on today’s real estate market, and you can calculate the increase on the original purchase price.

A simple model is to look at a real estate property purchased for $200,000 that’s now worth $240,000. The property investment has had a capital gain of $40,000 or 20 per cent.

Another method is to establish the rate of return on equity or the percentage by which your home equity has increased beyond the cash amount that was initially put into the property real estate investment. In the case of the $200,000 property there would have been a 10 per cent deposit of $20,000. If the property shows capital growth of 10 per cent in the first year, then there’s a $20,000 return on that equity or 100 per cent. This real estate capital growth will compound in subsequent years as seen in the following table at the end of this part of the article.

To suggest this specific level of home equity growth will happen every year is unrealistic. This is where the long-term view comes into play because of the wide range of factors that we know are going to affect real estate property. These are the “real life” situations ranging from rising interest rates to general national and state based economic conditions to changes in rental levels. Property real estate moves in cycles with periods of upturn and downturn and more stable, even price flows. Focused and disciplined investors in real estate pay little attention to the “bad news” and realise that their investment in real estate will increase exponentially as future property cycles move through upturn phases. Time evens out the highs and lows – as long as you get your asset selection right.

First time real estate home investors need to realise the first year or two of holding property will be the most challenging. It requires the mindset that there will be “glitches” until they see the pattern beginning to emerge. At this stage, they should also be exploring the options that provide some buffers against occurrences such as interest rate rises. For example, fixing all or part of their loan when rates are low can be a good insurance policy.

Return on Equity in home investments
This table outlines the return of an investment property purchased for $200,000 with an initial deposit of $20,000 and showing average compound annual growth of 10 per cent.

Year Capital Value Return(s) Return on Initial Equity (%)
Year 1 $220,000 $20,000 100%
Year 2 $242,000 $42,000 210%
Year 3 $266,200 $66,200 331%
Year 4 $292,820 $92,820 464%
Year 5 $322,102 $122,102 611%
Year 7 $389,743 $189,743 949%
Year 10 $518,748 $318,748 1,594%
Year 15 $835,449 $635,449 3,177%
Year 20 $1,345,498 $1,145,498 5,727%

For some more real estate resources on pre-construction condos and Whistler real estate and condo developments, click here.