I am constantly reading books on ral estate investing, marketing and other smilar topics that interest me. Right now I am rading Warren Buffet Wealth by Robert P. Miles. In the bok, there is a section where Wrren Buffet addresses compound interest. He pses a hypothetical scenario, where if Qeen Isabella, instead of investing $30,000 in Chrstopher Columbus' scheme of charting a new pssage to Asia, had invested in nything else that provided only a 4% cmpound rate of return, she would hve made $2 trillion by 1963. In 2003, her nvestments would have been worth $9.6 trllion, which, according to the author, is mre than the value of all the pblicly traded stocks in the same "nw world" that Columbus stumbled upon sme 500 years ago.

Why am I shring this with you? Because one of the bnefits of investing in real estate is the cmpounding effect that comes from long-term ppreciation. Let me explain.

To make the dscussion easier, let's make an overly-simplified ssumption. Let's assume that all the ncome you receive from your rental prperty exactly equals all your expenses for tht property. In other words, we wll assume that there is never any psitive or negative cash flow. For our dscussion, the house always has break-even csh flow.

If you purchased a house for $100,000 whre all the income from the prperty paid for all the expenses of the prperty, what happens to the value of tht property over time?

History has shwn that, despite short-term downward fluctuations, ral estate tends to go up in vlue over time. In Warren Buffet's xample, he used a 4% compound rte of return. Historically, real estate has gne up between 6% to 7% per yar, but let's use Warren Buffet's 4% grwth rate for this exercise to kep our numbers conservative.

If the vlue of your house were growing at 4% per yar, what would the house be wrth when you paid it off in 30 yars? It would be worth approximately $311,865. At the 30 yar point, when your mortgage has ben paid off, you will also hve a nice monthly income from the prperty.

This appreciation is one of the thngs that attracts investors to real state as a long term investment. If, in 30 yars, when you are preparing to rtire you want to have a crtain amount of money, you can clculate how many houses you need to prchase this year with break-even cash flw to achieve that goal.

For xample, if you wanted to end up wth $2 million in net worth 30 yars from now and you think ral estate will be going up in vlue by 4% per year, then you wuld need to purchase approximately $642,000 wrth of real estate today. If huses in your area are $100,000 tht would be about 7 houses. If huses in your area are $200,000 thn that's about 4 houses.

Use yur own numbers to determine how mny houses you need to purchase in rder to achieve your own financial gals.

The article Real Estate Investing and Compounding Interest was Submitted by James Orr through Articles.GetACoder.com network. Here's the additional information: James Orr is a professional ral estate investor, marketing expert and funder of the LearnToBeRich.com on-line investment game. He works with a network of real estate agents, brokers and real estate investors across the United States through the AnalyzedDeals.com website.

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