Grow Your Real Estate Wealth: Forced Appreciation vs Market Appreciation
Published on: Friday, December 18th, 2015
Grow Your Real Estate Wealth: Forced vs Market Appreciation
Appreciation is one of the biggest and most exciting ways to create and increase your wealth as a real estate investor. It can occur naturally or you can “force” appreciation by choosing the right properties and managing them the right way. Best of all, when you do this, you don’t have to be a speculator to take advantage of these increases in value and you can still enjoy all the other benefits of real estate investing such as cash flow and the tax benefits. Increasing the value of investment real estate is the number one way that millionaires are made in real estate.
Appreciation is the increase in value of your real estate investment over time. When the value increases, the investment is said to be appreciating. It can occur two ways. The first is through Market Appreciation, and the second is through Forced Appreciation.
Market value increases occurs when the overall market goes up. You might have experienced this in the past when prices of homes in your neighborhood started increasing and sitting on the market for shorter periods of time when put up for sale. In cash flow producing real estate, most properties experience market increases when rental rates and occupancy start going up across the market. Gradually, as rents and occupancy increases, so does the income of the property. When the income goes up, the value of the real estate can increase exponentially.
Market increases tends to occur more rapidly on the coasts of the United States where values will rise and fall quickly where as in the Midwest, it’s usually a much more gradual rise and fall. This is where selecting the market and location of your investment is so important. By having the right asset type in the right market, you are more likely to experience market increases. One of the best ways to predict when your market is going to appreciate is by looking at Market Cycles. However, investing in rapidly changing markets like those on the coasts is not always the best thing for each investor. There can be some big advantages to investing in a more predictable market (like the Midwest), as well, with a slow and steady increases and less market downturns.
In the multifamily sector, market increases generally occurs when there is an increase in population, jobs, or where there is an increase in people wanting to rent instead of buying. When there are more renters, rental rates go up and market increase occurs. Increased rental demand occurs when jobs are created or when a population increases. It also occurs when fewer people can or want to buy a home and instead opt for renting.
The other type of appreciation is Forced Appreciation. Forced appreciation is the increase in the value of the real estate through actions taken by the current owner. Forced increases occurs by the owner actions either increasing the income of the property or decreasing expenses. Either one of these will increase the net operating income of the property and force the value to increase.
To force increases in value, it is important to have the right property manager and to pick assets with inefficiencies you can fix and in a market that supports it. Forced appreciation can occur by adding amenities, doing capital improvements, or raising rents over time.
If you improve the property just a little bit each year, allowing you to increase rents and in turn increase your NOI, your value will increase over time. Small changes can make a big difference in income producing properties. In income producing real estate, increasing the income or decreasing expenses by $1 can increase the value by $10 to $14. These small changes can really add up! The better you operate the property, the more money you will earn while you own it and the more it will be worth when you sell it. That is why choosing the right property and the right property management is so important.
Remember, with income producing properties, every dollar you increase the revenue or decrease expenses has a multiplying effect. Raising rents by $10 per month per apartment can increase the value of the investment real estate by $1,200 to $1,700 per apartment per year. If you did this each year for 5 years on a 50 unit apartment complex, you would increase the value $300,000 to $400,000. Over time, those small increases can really add up.
Appreciation is one of the biggest and most exciting ways to create wealth in real estate. You don’t have to be a speculator to take advantage of it. It can occur by the overall market increasing or through the actions of the owner, called forced appreciation. Choosing the right property, property management, and making small improvements over time can have exponential results. Appreciation is the number one way that millionaire real estate investors are made.