Appreciation Leverage

Appreciation leverage happens when you borrow money at simple interest and invest it into a compounding investment such as real estate you can create great wealth for yourself.

Appreciation on properties compounds where as interest on properties (though not exactly simple interest) are normally in fixed installments. If let us say you buy a property in a place where the historical appreciation is at 7% and you borrow money also at 7% interest only mortgage you will find that at the end of thirty years your property would have gained in value by at least 3 times more than the interest you would have paid. And better still your tenant would have paid that mortgage.

As a thumb rule if your interest on your mortgage is lower than the expected appreciation rate then you will have positive appreciation leverage.

The best properties are those that have positive Cash Flow Leverage and positive appreciation leverage. Such properties are sure shot winners.

In certain high capital growth areas you will have properties that have negative cash flow leverage but positive appreciation leverage. Depending upon your situation you might like to buy such a property if you have problems of excessive cash flow and a very high taxable income.

No savvy investor will buy a property that has both negative cash flow leverage and negative appreciation leverage. But I amazed at the number of people who are coaxed into buying such properties by savvy sales people. You should try and avoid such properties as a plague.

The ultimate leverage is when:

Cost of Borrowing  <  Capitalization Rate

Interest Rate           <   Appreciation

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