Real Estate - Julie Ihara - The Ihara Team

What is Compounding?

Compound appreciation works like this: Imagine you own a property worth $100,000, and it grows in value by 4% each year. After the first year, it’s worth $104,000. In the second year, the 4% applies to $104,000, so now it’s worth $108,160. Each year, the growth builds on top of the previous year’s value, creating faster and bigger increases over time. This is how compounding can multiply your investment’s value.

We’ve all heard stories of an aunty or uncle who purchased a home decades ago for $80,000 or maybe even less, and now it's worth over a million dollars. That transformation is the result of the power of compounding.

Renting vs. Buying: A $1.6 Million Difference

Let’s look at the financial impact of renting vs. buying over 30 years using a real-life example. Imagine two people living in the same 2-bedroom condo, paying the same monthly fees, except one rented and one bought.

The Renter: Over 30 years, the renter spends a staggering $818,403 on rent. Despite all those payments, the renter ends up with $0 equity—none of that money contributed to building wealth. On top of that, the rent increases by an average of 3% per year, making it harder to keep up with rising costs.

The Buyer: The buyer, on the other hand, starts with a $100,000 down payment (perhaps saved or gifted by a family member) and pays the same $2,271 monthly payments over 30 years. However, there's one huge difference. After 30 years, the buyer now owns an asset worth $1,621,700.

Thanks to the power of appreciation, the home’s value grows by an average of 4% annually. After 30 years, the condo’s market price rises to $1,621,699. The buyer now owns a fully paid-off home worth over $1.6 million, with 100% equity.

Wealth is not built overnight, it's built over time. Many smart investors know it's not about timing the market but time in the market.

The Power of Compounding

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