Something nobody has noted (I think) explicitly in the thread is the inherent effect of cheap leverage on the gains you enjoy from even modest appreciation. In ARS' example above, if you have a 100k house on which you've put down 20k, and the house appreciates even a piddling 2k per year, due to the magic of leverage, you are rewarded by an additional 10% return on your original investment just from that appreciation alone (2k in appreciation / your original 20k investment = 10%, completely independent of rents received).

i've always wondered about this, but isn't your leverage being eroded by the fact you are paying interest? is your $20k initial investment not accumulating each month due to interest payments?

further, i have also always felt the perceived tax 'benefits' of home ownership is overblow. sure, rentals and schedule E works out fine, but for your primary, you need to pay a lot of interest to exceed the standard deduction amount.

Hey bro, I'm not entirely sure what you meant by "leverage being eroded by the fact that you are paying interest." Yes, you are paying interest, but you're making more in rents (on a percentage basis) than it costs you to borrow the money - this is the definition of leverage, and frankly, one of the sexiest reasons to do real estate to begin with. I can't think of anywhere else where you get a cheap, long-term, non-callable leverage. If someone would give me 4% money - and no option to call the loan in - for 30 years, I would take out a kazillion dollars and put it in the stock market today for good.

To keep it simple, here's some back of the envelope math.

You buy a 100k house that rents for 1k monthly. You put down 20k. The bank loans you 80k at 5% - let's assume it is interest only for ease of the maths. After one year, the house has appreciated to 102k. What was your return overall?

First, your cost. You had to pay the bank 5% interest on the 80k they have so graciously loaned you, or 4k, for the privilege of holding their money. Boo, hiss. You are down 4k. (-4k)

Your house cranked out rents, though, on the order of 12k! Let's say you lost half of that in expenses, so you profited 6k in rents. (+6k)

...But the house also appreciated in value at inflation rates (of 2%) for a 2k net gain! (+2k)

Ergo, your total return for the one year would be... -4 + 6 + 2, or 4k. On a 20k investment, this is pretty darn good, no?

If you wanted to factor in inflation, the simple math would be something like: your 20k has sat around doing nothing for you (boo, hiss), so it has eroded by the 2% that we brought up above. Stuff that previously cost $100 now costs $102. Your 20k is now only worth... $19607 . So technically, if we are accounting for your stale-ass 20k sitting around and losing value, your net gain of $4k above would probably more accurate be described as a net gain of $3607, still a pretty solid return on 20k.

Most people I have talked to seem to take appreciation as an "icing on the cake scenario," meaning that in the example above, you'd "only" profit $1607 on your initial 20k investment. Still not bad... and that's assuming that the house doesn't even appreciate with inflation, which should proooobably not happen.