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W hy Y ou Should Invest in Real Esta te

sell in year 10, you still owe a mortgage balance of $129,200. At Money ’s
reported historical average annual price gain of 4.5 percent, your sales price
equals $310,600. You pocket $181,400 ($310,600 less $129,200). During this
period, inflation averaged 2.9 percent (4.5 1.6 2.9%), which means that

you multiplied your $40,000 original cash investment by 353 percent. Yet,

during the previous 10 years, inflation increased by merely 33 percent (2.9 p ercent
compounded annually).
To match infl ation, your original $40,000 would have to have grown to

just $53,237, but, in fact, as measured by inflation-adjusted dollars, your
$40,000 grew to $136,300 ($181,400 discounted over 10 years at the
historical annual inflation rate of 2.9 percent). You can easily see from these

figures that inflation-induced price increases greatly enhance the real wealth
of investors who own property.
Infl ationary Gains: Property versus Stocks Over the longer term, U.S.
infl ation has averaged about 3 percent a year, although sometimes the country

goes through extended periods of much higher inflation. One such period lasted
from the mid-1960s until the early 1980s, when the Consumer Price Index
(CPI) jumped more than threefold, from 95.4, in 1966, to 289.1, in 1982.
Between 1966 and 1982, the median price of a home escalated from
$21,000 to $70,000. As measured by the Dow stock index (DJIA), equities
not only failed to keep up with the CPI, they actually fell in nominal value.
In 1966, the Dow hit 1,000. By January 1982, it registered a mere 875.
Will history repeat? No one knows. To guard against the risk of infl ation,
experience shows that no asset protects purchasing power as well as property,
especially leveraged rental property. Even better, investment analysis demon-
strates that leveraged property investors don’t merely tread water during
inflation; to their good fortune, their real wealth multiplies many times over.

To see the relative investment performance of property and stocks during

this high inflationary period, look at Exhibits 13.1 and 13.2 .

Wealth from Appreciation

Inflationary increases in the prices of materials and labor push up the costs of

construction, and therefore the prices of properties. However, most properties
also appreciate in value because demand presses against a constrained supply.
If you invest in properties that will benefit from the growth in jobs,

incomes, and population, your properties will likely go up in value much
faster than the long-term, average price increases of 4.5 percent a year. During
the fi rst half of this decade, such hot spots included Phoenix, Las Vegas, and

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