Real estate is probably the single largest investment in the portfolio of every family across the globe. Most middle-class families invest the maximum amount of money in their residential homes.In many parts of the world, this is reinforced by the fact that houses have exponentially risen in value. Stories of 50 times appreciation over a period of 20 years are not uncommon.
However, it is important to note that this is nowhere near an extraordinary rate of return. Even if a property has grown 50 times in 25 years, its annual rate of growth is less than 10 percent. It is lack of literacy about the magical effects of compounding that makes people blindly chase real estate.
The important point is that people look at historical data about real estate and expect the trend to continue. This means that they expect that over the next 50 years, the property prices will once again increase by a multiple of 100. This may or may not be true depending on the location.
When venturing into real estate, much like any other investment, the first thought that comes to a developer’s mind is the returns.
Land appreciates simply because it’s limited in supply. Consequently, as the population increases, so does the demand for land, driving its price up over time.
Owning land opens up the possibility of selling the first property and financing other investments such as developing another plot. As such, real asset becomes a greater source of financial security for an investor.
Source: Business Daily