In a previous blog post (https://realestateofhawaii.com/real-estate-blog/why-invest-in-real-estate/(opens in a new tab), I mention what I feel are the five main benefits of investing in real estate. If you read it, you’ll see that the very first thing I discuss is Appreciation. In this blog I wanted to look at some historical data to show you how real estate investing for appreciation can have a really strong upside, but also a downside too.
Ok, so, my proxy for this discussion and calculation for historical market prices is the historical median sales prices from 1985 to 2020 for the island of Oahu provided by the Honolulu Board of Realtors. If you want the raw data to audit my calculations, shoot me an email and I can send it to you.
Let’s start with the downside. One of the worst downturns for Oahu real estate was from 1993 to 1999. One of the big factors was the bursting of the Japanese economic bubble. For condos and townhouses, there was a 35% decrease in the median price from $193,000 in 1993 to $125,000 in 1999. It took about 9 years for prices to get back to the previous peak.
In terms of winning cycles in the real estate market, we look at the 4 years from 2001 to 2005. In 2001, the median price for a single-family home was $300,000. By 2005 the median price had jumped by leaps and bounds to $590,000.
Ok so another great benefit of real estate investing is Leverage. If you read the blogpost previously mentioned, it’s Benefit #4. So, let’s discuss how you may have gained from investing in this time period with leverage. Say you purchased your home in 2001 for $300,000 with debt and put down 20%. So, you’d have a down payment of $60,000. After 4 years of owning your home it shoots up to $590,000, that’s $290,000 appreciation on your $60,000 initial investment. And that’s a 484% cumulative return which comes out to be a 46% annualized rate of return on your investment. That is pretty spectacular.
Unfortunately, you can’t time appreciation and that’s why I like a diversified portfolio, but again, it totally depends on your situation. Remember these numbers are for Oahu, and real estate is local. Because we are on an island, buildable land is scarce, new construction isn’t being built quick enough for demand and we have a serious affordable home crisis here.
One more bit of perspective I wanted to share for any real estate investors invested or considering investing in Hawaii is looking back at the last big economic downfall, the subprime crisis and comparing Hawaii real estate to the US Stock Market. Oahu single-family homes declined 11% while the US stock market and real estate values in other states dropped 50 plus %. But in the market’s defense, it took only 4 years to recover while it took about 6 years for Oahu’s median prices to recover.
If you want to hear my philosophy for real estate investing and how it applies to your situation, feel free to reach out to me to chat. Having invested in Hawaii and across the US, I have my own opinion that I’d love to share with you.
Thanks for reading and, in the words of the French Philosopher, Voltaire, “Appreciation is a wonderful thing. It makes what is excellent in others belong to us as well.” I’ll see you next week!
