Understanding Recaptured Appreciation
One of the most compelling reasons to buy real estate now is the opportunity for short term appreciation growth due to the overcorrection of real estate prices. Just as there was no valid justification for 20% annual appreciation growth in 2004 and 2005, there is also no valid reason for the excessive drop in prices we have seen in the last couple of years.
Per the attached chart, apply The 5% Annual Appreciation Rule to determine what the value of a property should be. Housing values typically appreciate at 5% per year in normal market. Identify what the value of an investment property was prior to the boom in 2002-2003 and multiply that value by 5% every year until you reach today’s value. Compare the purchase price today with what the actual value should be. In many cases, the actual value is significantly lower giving a buyer a great investment opportunity.
For example, assume that at 5% appreciation per year a home’s value should be $350,000.Also assume this home has lost nearly half its value from the high of $500,000 and is now selling for $250,000. By deducting the $250,000 purchase price in today’s market, from the $350,000 price the home would sell for in a healthy market, a purchaser can realize $100,000 gain once the real estate market recovers. Metamorphosis calls this profit recaptured appreciation.
Prospective buyers should exploit the window of opportunity to recapture appreciation that has been caused from an overcorrection in prices.