Exactly How Houses Make You Wealthy

TLDR
One $300,000 house held for 30 years at 3% appreciation with an 80% mortgage is worth about $728,000 in paid-off equity. Flipping a house is the same move as owning a rental, just at a different exit.

Table of Contents

The Wealth Calculator

There is nothing I like more than counting my chickens. Figuring out what the results of my work today look like in 30 years. So I built a wealth calculator and you can have it for free.

Here is the setup. Home value $300,000. That is the after repair value of a house I am thinking about buying. Loan to value 80%, which means an $80,000 mortgage on every $100,000 of value, or in this case $240,000 of mortgage. Hold it 30 years.

Result: wealth at duration $728,000.

That means if I bought the house today, put a tenant in it, refinanced it, and held it for 30 years, the mortgage would be paid down to zero and the home would have grown in value. My net worth from that one property would be around $728,000.

If I buy eight of those this year, $2.4 million of home value today, 30 years out I am worth about $5.8 million just from those houses. That is the power of real estate.

One house, 30 years, one tenant paying your mortgage. That is the whole game.

The 30-Year Math

Why 30 years? Because most of the mortgages I teach people to get are 30-year fixed. That is the longest fixed term you can easily get today, and long fixed rates are the point. You lock your cost of money for three decades and let the tenant pay it off.

There are shorter loans. There are variable loans. There are balloon loans. Those are not the ones I teach, so the app defaults to 30 years. You can change it to 20 if you want to see a tighter number.

Interest rate in the app defaults to 7%. You can change it. Hopefully it keeps dropping. It used to be a lot lower and that was awesome.

Why Most Of The Interest Hits Early

When you look at the mortgage line on the calculator, it does not go down in a straight line. It curves.

That is because on a normal mortgage, you pay most of the interest up front. Early on, almost every dollar of your payment is interest. Later, almost every dollar is principal. That is why your net worth on this chart starts slow, then bends upward as the years go on. You are paying down more of the actual loan balance later, which builds equity faster at the end.

Bump the rate from 7% to 10% in the app and watch the curve get sharper. More interest up front, equity builds even slower early, then catches up.

Pro Tip
This is one of the best reasons to hold long term instead of selling at year seven. The last ten years of a 30-year loan is where the equity actually explodes.

Appreciation: Conservative Numbers Win

Over the last 30 years, home values have appreciated on average around 4.27% per year. If that held for the next 30 years, the $300,000 house would end up worth much more, and my net worth would be bigger than $728,000.

I do not plan my deals on 4.27%. I plan on 3%, because I am a conservative guy. You always want your deal math to work at a lower number than the average. If the average shows up, great, that is icing. If it does not, you are fine anyway.

Common Mistake
Running your projections on 5% or 6% appreciation because that is what it did lately. If the last two years were 6% and the long term average is 4%, the next few years are more likely to average below 4% to pull the mean back. Plan on 3%. Be surprised by 4%.

Plan on 3%. Be grateful for 4.

Why A Flip And A Rental Are The Same Move

A lot of people think flipping houses and owning rentals are different businesses. They are not. They are the same move with different exits.

Here is how a flip works. You buy a house for $150,000, put $50,000 into it, all in for $200,000. It is now worth $300,000. You sell it. The gap between $200,000 and $300,000 is equity, and by selling, you convert that equity into cash in your pocket. Then you pay a bunch of taxes on it.

Here is how a rental works on the same deal. Same buy, same rehab, all in at $200,000. Same $300,000 value. Instead of selling, you go to a bank and say, I have $200,000 in this house, it is stable, there is a tenant in it, I want a long-term fixed mortgage to replace my acquisition loan or my hard money loan.

A bank will give you 80% of the appraised value. 80% of $300,000 is $240,000. You only had $200,000 in the deal. So the bank hands you $240,000. You pay off the $200,000 of costs and you keep the extra $40,000 in your pocket from the cash-out refinance.

Now you own the house. The tenant pays the mortgage. The mortgage amortizes down over 30 years. The house appreciates over 30 years. That is the calculator at work.

A flip and a rental are not different strategies. They are the same purchase with different endings. The flip ends at the sale. The rental ends at the refinance and keeps paying you for 30 years.

Flipping gets you in the door. Rentals build the wealth.

FAQ

What’s the difference between a flip and a rental if both work from the same buy?

The exit. A flip sells the house and pays capital gains. A rental refinances and keeps the house working. A flip pays you once. A rental pays you monthly and hands you a paid-off asset in 30 years.

I’m brand new. Should I flip first or go straight to rentals?

Flip first. Flipping teaches you how to buy, how to write a scope of work, and how to manage contractors. Those are the same skills a landlord needs. By flip three or four you can pick a property you want to keep and refinance instead of selling.

Is 3% appreciation realistic?

Long-term, yes. The last 30 years averaged about 4.27% nationally. A conservative planning number is 3%. Some markets beat that, some lag it. You want your deal math to work at a number lower than the average.

What happens if I can’t get a fixed rate mortgage on a rental?

You are in the wrong loan. Short-term loans, variable rates, balloons, and hard money on rentals are how people blow up when rates move. The whole point of a rental is a long fixed rate that the tenant pays off. If you cannot qualify for a fixed rate, wait until you can.

Do I need to hold for 30 years to make the math work?

No. The wealth calculator shows 30 because that is the mortgage length. You can sell any year along the way and take the equity that has built up to that point. Longer holds just build more equity because the tenant has been paying down the loan longer.