Are you considering a mortgage refinance but unsure of the costs? Refinancing your mortgage can save you thousands of dollars in the long term. When refinancing, negotiating lower interest rates, tapping into property equity, or shortening the loan term may be possible. However, the cost of refinancing your mortgage could outweigh any benefits of getting a new mortgage. 

Refinancing a mortgage—replacing your current loan with a new one—involves closing costs. The fees included in refinance are typically between 2% and 6% of the loan amount. While a refinance can offer numerous benefits, it’s crucial to consider the costs against the potential savings. Refinancing can be a savvy financial move if you can secure a new mortgage with better terms. 

This article explores the various costs associated with refinancing a mortgage. You will also learn how to lower refinancing costs for a better mortgage deal. Knowing what you can expect to pay to refinance can help determine whether it’s viable for your financial situation. 

What Is the Purpose of Refinancing a Mortgage?

A common reason for mortgage refinancing is to save money. Replacing an existing mortgage with one that has lower mortgage rates or a shorter term can reduce monthly payments, thus building equity in a home faster. Other reasons include debt consolidation, releasing cash from equity, or negotiating a longer term.

Another reason to consider a refinance is private mortgage insurance. For example, many homeowners switch from an FHA loan to a conventional loan when they reach 20% equity. This refinancing move allows them to eliminate the insurance requirements and associated costs.

Homeowners who struggle to make mortgage payments may consider a refinance. Securing a mortgage with a longer term can reduce the monthly payment. However, paying interest on the loan over a longer term makes it more expensive.

Whether refinancing your mortgage is a good financial decision depends on whether the savings justify refinance closing costs.

Related: How to assess mortgage refinance rates

What Should I Expect to Pay in Closing Costs for a Refinance?

Typical closing costs to refinance your mortgage are between 2% and 6% of the refinanced loan. The up-front costs you can expect to pay depend on the loan amount, where you live, and interest rates. Also, factors like debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, and your credit score impact closing costs.

According to Freddie Mac, average closing fees are around $5,000. However, the loan principal, mortgage type, and where you are located all affect the mortgage refinance costs.

Other factors affecting average closing costs include:

• The amount of available home equity
• Mortgage refinance program
• Whether it’s a fixed-rate mortgage or an adjustable-rate mortgage
• Loan term

Like taking out a conventional loan, your lender will consider your financial position, ability to make the monthly mortgage payment, and credit history. It’s also vital to check the small print of your existing mortgage loan terms. Some mortgages have prepayment penalties, which can increase the cost of refinancing a mortgage.

Mortgage refinancing fees

Mortgage refinance closing costs add up quickly; therefore, it’s vital to understand the fees associated with refinancing. Here is what you can expect to pay in 2023:

• Application fee: $500
• Appraisal fee: $300 to $500
• Loan origination fee: 0.5% to 1% of the total loan amount
• Recording fee: The amount depends on state and county
• Title search fee: $200 to $400
• Title insurance fee: Up to $1,000
• Attorney fees: Vary depending on your state
• Survey fees: $300 to $900
• Credit check fee: $25 to $75
• Discount points: Up to 1% of the loan amount

Depending on the mortgage type and home equity, you may have varying costs associated with mortgage insurance premiums.

Here is a list of what you could expect to pay for private mortgage insurance in refinance closing costs:

• Conventional loans: 0.15% to 1.95% of the loan amount annually
• VA loans: 0.5% to 3.3% for the funding fee
• FHA loans: 1.75% up-front fee; 0.15% to 0.75% of the loan amount annually
• USDA loans: 1% up-front loan guarantee fee; 0.35% annual guarantee fee

Each mortgage lender has varying fees, and you may not need private mortgage insurance. Also, depending on the mortgage type, some lenders will waive certain fees. Therefore, it’s vital to consider all closing costs when taking out a new loan to ensure refinancing makes sense for your financial situation.

The Cost of Refinancing a Mortgage: Examples

The best way to understand how refinance closing costs affect your monthly payment is to see examples.

Financial calculators can often help you determine if you can save money on your monthly payments and the total cost of the new mortgage. The formula is generally this:

[Closing costs + fees] ÷ monthly savings = the number of months it takes to break even

Before refinancing, consider how long you plan to remain in your home. If you plan to move in the next few years, refinance closing costs may not allow you to break even. Therefore, it would make more sense to continue with your current mortgage.

Here are a few scenarios to illustrate how calculating fees and costs can help determine if a refinance makes financial sense.

Example No. 1

Let’s say a homeowner has a mortgage balance of $185,000 and wants to reduce the monthly payment. They find a new mortgage with better terms that allows them to save $175 per month. The closing costs add up to 3% of the new mortgage balance, $5,500. Therefore, their break-even point is 31 months, meaning they will save money on their mortgage after two and a half years.

The homeowner could choose a fixed-rate loan or a new loan with an adjustable interest rate, depending on market conditions.

Example No. 2

An investor has an investment property and wants to turn home equity into cash. They have a loan balance of $300,000 on a $750,000 mortgage. The borrower can use a cash-out refinance by taking out a new mortgage. For example, they want to raise $200,000 to invest in a new property. In that case, a mortgage broker can find a competitive mortgage with a new loan balance of $500,000, and the investor gets $200,000 in cash.

It’s important to note that cash-out refinances have higher interest costs than rate-reduction refinances. Therefore, it’s vital to calculate potential savings over the loan term.

Example No. 3

A homeowner has a mortgage loan issued by the Federal Housing Administration (FHA). Because of this, they must make monthly mortgage insurance payments. However, when they have at least 20% home equity, they can refinance into a new loan, eliminating the MIP (mortgage insurance premium). This move could save the homeowner around 0.45% to 1.05% of the original loan amount.

Even though the new loan interest rate could be higher, securing a shorter-term loan and avoiding the insurance premium could result in significant long-term savings.

Related: How to Refinance Your Mortgage: The Ultimate Guide 

Do You Have to Pay Closing Costs Every Time You Refinance?

You must pay fees when refinancing a mortgage. Average refinance closing costs are typically the same as when taking your original mortgage. You can expect to pay closing costs of between 2% and 6% of the loan principal. In some cases, you can negotiate some closing costs with the lender.

Therefore, when considering a refinance, consider all costs like origination fees, title, appraisal fees, monthly payment savings, and how long you plan to stay in the home.

Is There a Way to Avoid Closing Costs When Refinancing?

You can avoid paying closing costs in a lump sum when refinancing a mortgage. This is called a no-closing-cost refinance. This option allows you to roll closing costs into the loan’s term and pay them as part of your monthly payment. However, you cannot completely avoid all refinance closing costs.

Also called a “no-closing-cost refi,” delaying paying closing costs during a refinance makes financial sense when you plan to hold the property for less than five years. This way, you avoid paying thousands of dollars in closing costs and interest over the loan term.

If you plan to hold the property for over five years, a no-closing-cost refi has a higher interest rate. Therefore, you pay interest on the costs, resulting in a higher monthly payment and a more expensive mortgage. In that case, it’s best to pay the costs up front.

How to Lower the Cost of Refinancing a Mortgage

There are several options to reduce costs when closing a refinance mortgage. Of course, there’s no down payment required to refinance. However, you must have the money upfront when refinancing your mortgage. Therefore, exploring options to reduce costs is a smart personal finance decision.

Here are a few options that may help lower monthly payments and get a better mortgage deal.

Improve your credit score

Boosting your credit score is wise before considering a mortgage refinance. A score of at least 740 will help you lock in the lowest interest rate and improve your chances of loan approval. It may also give you more leverage to negotiate certain closing costs with your lender.

Some ways of improving your credit score are to pay off credit card debt, pay bills on time, and limit new credit applications before applying for a mortgage.

Shop around for better mortgage offers and rates

Compare offers from multiple lenders to ensure you get the best refinance rates. In many cases, a mortgage broker has access to several refinance lenders and banks. They can also give you the best financial advice for your circumstances. It is also good to compare the benefits of an adjustable-rate mortgage over a fixed-rate mortgage.

Also, don’t forget to get a quote from your existing lender. They may be willing to waive or reduce some costs, like the application fee or appraisal fee.

Use a mortgage refinance calculator

A mortgage refinance calculator can help you determine your closing costs and how much your monthly payments will be. This way, you can estimate the potential savings of taking out a new mortgage.

Negotiate mortgage refinance costs and fees

One of the best ways to reduce the cost of refinancing a home loan is to negotiate closing costs with the refinance lender. Here is a list of the common closing costs your refinancing lender may be willing to reduce or waive:

• Home appraisal fees, if you recently had a property survey done
• Title insurance
• Credit report fees
• Taxes
• Title search fees

Certain expenses cannot be negotiated. For example, your loan officer cannot reduce fees charged by third parties. These may include the property survey, recording fees, and home appraisal to determine current market value.

Consider if buying mortgage points can reduce the cost

You may be able to pay less on a new mortgage if you buy mortgage points. Some lenders allow you to pay discount points upfront to offer a better interest rate. Typically, 1% of the loan amount is one point. However, this option only saves money if you plan to stay in your home for a long time.

Consider a no-closing-cost refinance option

If you are struggling to pay the costs of refinancing a mortgage, rolling the fees into a new loan can be a good option. However, your lender may increase the interest rate, making the mortgage more expensive in the long term. Therefore, it’s usually best to pay the closing costs upfront.

How to Refinance a Mortgage With Bad Credit

Like any loan application, lenders require borrowers to have a good credit score to approve refinancing a mortgage. Therefore, it can be tricky to get a new mortgage if your credit history is less than ideal. 

However, certain strategies can help you secure a new deal. Here are a few:

• Improve your credit score: Getting your finances in order can improve your credit score. Bringing your score above 620 will help you refinance your mortgage.
• Shop around lenders: Some lenders may give loans to homeowners with a score of below 620. However, you typically must show other ways that you are creditworthy.
• FHA loan: You can refinance an FHA loan into an FHA Streamline Refinance without the usual credit check.
• Apply with a non-occupying cosigner: If you struggle to refinance your mortgage due to bad credit, applying with a co-client could be a good solution. The lender also considers their monthly income, assets, and credit score during the application process.

The Cost to Refinance a Mortgage—Conclusion

Refinancing a mortgage can save you thousands of dollars over time. A refinance can be a useful financial strategy to get lower interest rates, pay off a mortgage faster, or consolidate debt. In addition, you can use a cash-out refinance to access equity. Refinancing is also helpful if you have trouble making payments or want to eliminate premiums on mortgage insurance.

How much does it cost to refinance a mortgage? That depends on your lender’s closing costs, fees, and interest rates. Generally, you must pay between 2% and 6% of the loan principal in closing expenses. Therefore, strategies to lower closing costs can be a wise investment move to help secure your financial position.

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Mortgage rates have been trending upward since last March when the Federal Reserve began tightening the reins on inflation. Last November, they even hit a 20-year high, clocking in at over 7% on the typical 30-year loan. Now, less than a year later, they’ve broken that record again, notching yet another two-decade high at 7.23% as of Aug. 24. 

Historically, that’s not the highest rate we’ve ever seen, but compared to the record-low rates of just two years ago, it’s quite the about-face for anyone looking to buy a house. In fact, according to Redfin, as of July 30 the typical homebuyer’s monthly mortgage payment is now up 19% compared to just a year ago.

The question is this: How much worse can it get? And is there any hope for lower rates on the horizon? Here’s the scoop.

A Double Whammy for Buyers

If you’re looking to purchase a property anytime soon, high mortgage rates only add to an already challenging situation. For one, inventory is incredibly low, and with 80% of homeowners having a current mortgage rate of 5% or less, according to Zillow, the likelihood of much existing inventory hitting the market is pretty low—at least until rates drop some.

According to a recent Zillow survey, homeowners with rates under 5% are half as likely to sell their homes as those with rates above that threshold, essentially locking up a good portion of that existing inventory. (Total for-sale inventory fell 19% in July, according to Redfin, and new listings were down over 20%.) 

This, of course, trickles down to home prices. With such low inventory, buyers are forced to compete for the few options out there—keeping prices elevated until something finally shifts. 

According to the most recent Real House Price Index from First American, consumer homebuying power, defined as how much one can buy based on changes in income and mortgage rates, has now dropped 9% year over year. In addition, “real” home prices, which take into account mortgage rates and nominal home prices, are up a whopping 12% in the same period. 

As Mark Fleming, chief economist for First American, put it: “While many expected that a higher mortgage rate environment would prompt house prices to adjust downward, the lack of housing inventory amid a resilient economy is keeping a floor on how low prices can go.”

What’s Next?

We’re nearing the housing market’s slow season of winter and the holiday season, which is when home prices normally drop and competition wanes. According to most forecasts, we’re likely nearing the peak for rates, too. 

Fannie Mae’s latest forecast says the 30-year fixed-rate mortgage rate will dip to 6.6% by year’s end, while the Mortgage Bankers Association has its sights on a 6.2% average rate. Either way, it’d be an improvement for those looking to get in on the market—if they can find a property.

The trajectory of rates over the next few months will depend on what the latest economic indicators say, as well as how the Federal Reserve responds to them. As of now, the CME Group’s Fed Watch Tool shows there’s an around 80% chance that the Fed makes no changes to its benchmark rate next month. If that’s the case, rates could moderate or even drop later on in the year.

As for 2024, both Fannie and MBA expect a steady downtrend in rates, with MBA eyeing the lowest rate of the two—an average of 5%—by the end of the year. By 2025, we could see rates in the 4% range, according to the trade group. 

Until then, though, homebuyers and real estate investors will have to make do with rates that are quite a bit higher than just a year or two ago. That means getting creative with financing (adjustable-rate and shorter-term loans), negotiating buydowns, or using equity to make bigger down payments and, hopefully, qualify for a lower rate.

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Orphe Divounguy, Zillow home loans senior economist, joins ‘The Exchange’ to discuss America’s housing affordability crisis, Zillow offering a one percent down payment loan program in Arizona, Zillow’s plan to roll out the home loan plan beyond Arizona.

Networking is an essential skill for entrepreneurs to learn because it generates business.

The term networking can become over complicated. It is simply starting and nurturing relationships which is something that humans do throughout life.

It doesn’t have to be difficult. Practice, repetition and following the tips below will help you build rewarding professional relationships wherever you are, whether that’s at work, a seminar, a party or on a flight.

Define Your Objectives.

Who do you want to meet and why? How many networking events will you commit to attending? Where will you go to network? How will you measure your progress? What do I want to get help with?

Asking yourself these powerful questions is a great place to start. You can’t hit a goal without a target, so be strategic about your time and your intentions.

Be Mindful Of Your Personal Brand

First impressions really do count. Before attending a networking event, think about how you will introduce yourself. Do you have an elevator pitch of around 30 seconds? If not, write and practice one. Make sure you are dressed well and feel confident in your appearance (whatever that means to you). Your personal brand also follows you online, so be mindful of how you want to show up.

Find A Networking Partner

Networking can feel scary. Introverts should find someone to attend events with to take the edge off. This tip is also very good if you know that you need help staying accountable. Having a networking partner will mean you’re both more likely to show up.

Be Vulnerable

Is anybody surprised that 75% of entrepreneurs have reported concerns for their mental health? Running a business is hard and can be a lonely road. This is not to say that you should treat networking as a free talking therapy, but be vulnerable about the problems in your industry or that you’re facing in business. Vulnerability builds deeper connections more quickly, and you never know if the person you’re talking to has the perfect solution to the issue that’s holding you back.

Take Advantage Of The Internet

LinkedIn is not just an online resume. It’s the most suited platform for building professional relationships, so make sure to interact with content, post your own content and send direct messages. Aside from LinkedIn, you can network on every other social media platform. Attending online workshops and being active in forums are other ways to meet people who share your interests.

Always Add Value

When you make a connection ask yourself two questions.

1. How can I help this person?
2. Who else in my network can help this person?

Openly sharing knowledge, contacts and opportunities to help others win will create a culture of generosity within the relationship. The other person will be more likely to help and introduce you to others when the time comes.

Listen

People tend to talk more than they listen. If you can learn to truly listen, you will gather so much information about people, the industries they are in and the professional problems they face. It is said that knowledge is power.

Follow Up

Networking doesn’t start until you follow up. Aim to send a text, email or direct message within 24 hours of meeting someone. Check in with them every 3 to 6 months to further nurture the relationship.

Review Your Progress

Six months after attending a networking event, review the relationships that were built. You might start to notice trends such as which types of events are the most beneficial to your networking goals. From this exercise, you can tailor your networking strategy if needed.

Take The Pressure Off

Building relationships is a skill that you have already been practicing for years, so try not to feel intimidated by the word networking or by trying to ‘do it right’. The more you network, the more confident you will get.

Networking is about establishing connections and creating a supportive community. Even if you don’t have a specific product or service to promote, your presence can still contribute to engaging conversations, the exchange of ideas, and potential collaborations.

This article is presented by Avail. Read our editorial guidelines for more information.

One of the easiest ways to establish a consistent income stream is by improving lease renewal rates among your tenants. Doing so can help you avoid turnover costs that quickly add up and help you retain tenants you’ve enjoyed renting to.

There are various ways to find and keep great tenants, but we outlined the top six ways to increase lease renewal rates.

1. Provide a Positive Renting Experience For Tenants

One of the strongest ways to increase lease renewals is by offering tenants a renting experience that considers their feedback and addresses their complaints. In other words, the quicker you act on maintenance tickets or implement feedback on making paying rent easier, the more likely a tenant is to renew, even if you plan on raising rent. 

But exactly how can this be done? That depends on the feedback you generally receive that could impact a tenant’s desire to renew. For some, this can be a non-working A/C unit or outdated kitchen appliances. For others, this can be paying rent via checks versus online payments. The key is having a good grasp on how your tenants feel about both the rental property and adjusting where necessary. 

2. Regularly Request Feedback From Tenants

Requesting feedback from your tenants on a monthly or quarterly basis can provide visibility on the areas of improvement, which can increase the likelihood of your tenants renewing if immediately addressed.

To collect feedback, this can be through direct contact with your tenant (if you have the time), or you can create an online form to email your tenants at a cadence you prefer. This method can make it easier to keep track of feedback, especially if managing several rental properties or tenants. Examples of questions to include in the form can be:

• How would you rate your current experience at [address] on a scale of one to 10? One being horrible and 10 being excellent.
• Do you have any feedback on your experience with our team? This could mention you as the landlord or a property manager. 
• How likely are you to renew your lease once your existing lease expires? If not likely, please elaborate on why.

You can determine what changes to make to increase your lease renewal rates from these responses. 

3. Offer Incentives to Renew a Lease

While this is not required, there are different ways to incentivize tenants to renew that can sometimes be the final nudge a tenant needs to lock in a new lease. Some examples of this are:

• A slight percentage or dollar amount reduction to the new rent price.
• Free rent payment reporting to credit bureaus.
• Waived payment processing fees (if able).

The opportunities are endless, so explore options you’re comfortable with offering.

4. Notify Tenants in Advance of Plans to Raise Rent

Over the past few years, all-time-high rent prices have been top of mind for millions of renters, so it’s no surprise that they’re often not excited to learn about a landlord’s plan of raising rent. Although this is inevitable to increase profits and cover the rising cost of managing a rental, it may be best to notify your tenants 2-3 weeks before sharing the lease renewal proposal to talk through it first. 

You can provide your reasons for raising the rent and let your tenants share their thoughts on your plans. They may try to negotiate a lower rent price that’s still above their current rent. In this case, you can decide if you’re flexible on your plans to increase the chances of them renewing or will stick to your new price. 

5. Make the Lease Renewal Process Easier to Complete

Automation is a landlord’s best friend—it helps you save time (and even money) by simplifying tasks that have historically been manual, such as lease renewals. Instead of going back and forth with tenants via email on lease renewal plans, you can leverage property management software to automate the process.

As the landlord, you can input the new rent price and any incentives you plan to offer. The system will usually ask your tenants if they want to renew. If so, they can sign a new lease agreement with an updated rent price and new clauses (if any) to sign online. If not, you can begin the tenant turnover process by marketing your rental property on reputable rental sites. 

6. Add Improvements to the Rental Property 

Like with many things, certain characteristics or features of your rental property can be considered past its prime and time for change. If you’re unable to offer incentives or make any further changes to how you manage your rental, consider improving the property itself. This can be anything from refreshing the paint in each room to replacing the kitchen appliances with new stainless steel ones. 

Some tenants may offer to add changes themselves, which can be helpful, but ensure they’re not violating landlord-tenant laws by doing this or expecting a deduction in rent in return. 

Conclusion

Being able to retain your tenants not only ensures a consistent rental income stream but can also improve the reputation of your business. That’s why implementing steps, whether it be offering incentives or regularly requesting feedback from tenants to improve processes, is an integral part of the success of your business. 

This article is presented by Avail

Feel good about the way you manage your rentals.

Avail, by Realtor.com, is free rental property management software that enables landlords to advertise their rental property listing across a dozen sites, screen tenants with customizable questions, request in-depth background checks, create and sign state-specific leases, collect rent, track your rental income and expenses, and much more — all online. 

512,000+ landlords use Avail because it’s the only end-to-end platform that helps you scale from beginner landlord to professional with tools, support, and education.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Could a tiny start-up in the online talent sourcing market really take on the industry giant LinkedIn? The founders of Weekday believe they can survive and prosper in this David versus Goliath story – and so do investors in their $2.2 million seed round, which the company is announcing today.

Founded in 2021 by Amit Singh, Anubav Malik and Chetan Dalal, Weekday is targeting a single industry as it builds its business – albeit a large and lucrative one in software engineering. The company has already built a database of more than 800,000 engineers, a pool from which it claims recruiters will have a better chance of finding the best talent.

“We want to solve the problem of lack of trust in the hiring process,” explains Singh. “We believe that a recruiting platform with references as the cornerstone is the solution that solves all these problems – we are what LinkedIn should have been.”

By “problems”, Singh means that while recruiters appear to be well-served by rival platforms that offer access to millions of would-be candidates for roles, identifying the best people on those platforms is often challenging. In particular, candidates’ references may be misleading, because they’ve often sought them out themselves.

Weekday’s alternative is a different type of model. It invites software engineers to sign up and to connect their “social graph” – essentially their LinkedIn networks and other contacts. The platform can then search for engineers who match a particular recruiter’s needs; Weekday then approaches the closest contacts of those who make the shortlist and seeks references for them. “The quality of candidates is much superior to any job board-based platform,” Singh insists.

His analogy is to internet shopping, where many customers will not buy without first reading the dispassionate reviews of products posted by other shoppers. Recruiters should be able to read the same sort of reviews when looking for candidates for their roles, Singh argues. But currently, they seek out references only once they’re very close to making an appointment – and even then, those references typically come from people lined up by the candidate, rather than being provided independently.

Weekday’s approach therefore offers the potential for recruiters to connect with the best candidates for their roles more quickly. “We have a ready pool of users willing to give references; that, along with automated reference forms being sent on WhatsApp and by email, makes reference collection very easy and fast,” Singh explains. “For most candidates, we are able to get quality references within 24 hours.”

It’s an interesting approach, particularly in the software engineering sector where the battle for talent is hot and remote working is becoming the norm. Recruiters are racing to hire good-quality engineers but need to be sure they’re talking to the best candidates, many of whom they will never meet face to face.

Singh, Malik and Dalal have spent the past two years refining the product and building their database, but have now begun to sell Weekday’s services. So far, around 120 companies have used it to recruit staff – participation on the platform is free, with recruiters only paying a fee if they hire through the company.

It’s a humble start given the scale of the main competition. But Weekday, backed by the Y Combinator accelerator, thinks it has a shot at winning plenty of business from the likes of LinkedIn. “We believe that in order to build a truly powerful hiring platform; social data and references need to be the centrepiece,” Singh says. “It is the back-channel references which end up being the most important ones.”

The company’s target market is essentially any business looking to hire software engineers, but the founders believe start-ups making their first engineer hires – and in need of support rapidly – are likely to be early adopters. If the model works, moreover, there is no reason why it cannot be applied in other areas of the technology sector, or even to support recruitment in completely different industries.

For now, that’s some way off, but the $2.2 million of seed funding raised by the business speaks to the faith that investors have in its potential. The funding round was led by Venture Highway, with participation from a number of angel investors. “While most other company functions, including design, product, dev tools and sales have seen breakthrough products in the last five to six years, recruitment still hasn’t,” says Venture Highway’s Aviral Bhatnagar. “LinkedIn is a 20-year-old company that continues to be the defacto platform for recruitment – we are partnering with Weekday as they try to change that.”

We all know that one person who bought a property for a price that seems unfathomably cheap by today’s standards, such as $50,000, and it’s now worth $350,000. It’s crazy to think that just 50 years ago, median home prices were right around $24,000. 

Today, the median home price is over $456,000, according to the Department of Housing and Urban Development. In 50 years, property prices have increased by nearly 14x. 

This is enough to get anyone to buy real estate and to become wealthy, right? Well, not exactly. The numbers I’ve shown you so far are nominal home prices, meaning they have not been adjusted for inflation. But as investors, we want to understand how our money is growing relative to our spending power, and for that, we need to use real housing prices.

Adjusting Home Prices for Inflation

In this context, “real” just means “inflation-adjusted.” When you adjust real estate prices for inflation, the growth looks much less impressive. Property values are still going up but in a much less dramatic way. 

Despite the impressive-looking run-up in housing prices over the last 50 years, the average real growth rate of property values is just 1.8%. Getting 1.8% on your money above inflation is not bad, but it’s not great either. Consider the fact that Over the last 20 years, the real yield on 10-year U.S. Treasuries is 0.86%. This means you could do pretty much nothing with your money and get relatively close to the real growth rate of property values. 

Of course, this simple analysis of home prices doesn’t paint the full picture of returns that you get from investing in real estate. It doesn’t factor in leverage, amortization, cash flow, value-add, or many of the tax benefits that come from real estate investing. 

Price Growth is Not as Important as We’re Led to Believe

To me, all of this data shows that property prices are not what drive real returns for real estate investors. This data underscores the importance of not counting on appreciation to make your deals work. This is particularly true in today’s uncertain economic climate. If you look at this graph of real property value growth rates over time, you can see that there are many periods of negative growth. 

Real property growth is far from certain! Over the last several years, in an ultra-low interest rate environment, it was reasonable to assume price appreciation above and beyond inflation, at least for a few years. Personally, I think those days are behind us. Given high rates and high levels of economic uncertainty, appreciation is falling back to what it was historically: an excellent inflation hedge, a floor for your returns, and a potential bonus if you invest in the right areas. 

Final Thoughts

Don’t get me wrong, I look for deals that have strong appreciation potential, but it’s not wise to count on appreciation to drive your returns. You need cash flow, value-add, and amortization to serve as your fundamentals, and if you experience some real appreciation on your property, that’s just gravy. As this data shows, appreciation is not always as powerful as it appears. 

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