Just like any other industry, real estate has its own jargon. And among these is “property appreciation.” As a budding real estate investor, familiarizing yourself with what it entails can help simplify some aspects of your investing journey.
So, what is appreciation in real estate? And does it have any effect on an investment?
Well, these are the two major questions that we will focus on in today’s blog!
What Does Real Estate Appreciation Mean?
When something appreciates, it basically means its value has gone up. When the value of a property goes up over time, it’s said that it has appreciated.
Now, appreciation can either be organic or forced. With organic appreciation, it means that the rise in property value has happened naturally without any intention on the part of the investor. The rise occurs due to the normal market forces of demand and supply.
On the other hand, forced appreciation doesn’t occur due to normal market forces. Instead, it occurs as a result of the investor's actions, such as property improvements. By making the right upgrades, the property is bound to increase in value.
What Are the Key Factors That Affect Real Estate Appreciation?
Housing Market Conditions
Are homes in the area you intend to invest in in higher demand? If so, then the prices of such homes are bound to be high.
When the demand for available homes is higher, such a market is usually referred to as a seller’s market. In such a market, buyers outbid each other to seal the deal. Consequently, this leads to higher home prices.
Contrastingly, when the supply of homes exceeds demand, the market becomes a ‘buyers market.’ With buyers having so many options, it usually forces the sellers to “give in” by selling their homes for less. This leads to a reduction in the market value of a property.
Mortgage Interest Rates
Another factor that will greatly affect housing factors is the prevailing mortgage interest rates. Why? Because the higher they are, the harder they will become accessible to budding real estate investors.
Higher mortgage interest rates will push up the monthly payments, making the facility less attractive.
Lower interest rates, on the other hand, encourage buyers to venture into real estate. This leads to increased housing demand, which naturally pushes up property prices.
Local Market Prices
Real estate appreciation at the national level is one thing and at the local level is another. The rate of property appreciation will vary from one locale to the other, even at the neighborhood level.
Homes located in great neighborhoods will often appreciate more quickly than those located in less desirable areas. Some of the key features that can make a location highly sought after include:
- Proximity to public transportation
- Proximity to major highways
- Quality schools
- Access to parks and recreational facilities
- Low crime rates
Homes in such neighborhoods will naturally be in high demand, which may inflate the asking prices.
In contrast, a home located in a not-so-great neighborhood will have less demand among prospective buyers. Some of the factors that can make a neighborhood less sought after among prospective buyers include:
- High crime rates
- Proximity to industrial areas, such as landfills
- Limited access to public transportation
- Lack of essential amenities, such as pharmacies, grocery stores, parks, and schools
Property Upgrades
Property upgrades usually increase the property’s value dollar for dollar. This is especially true if you invest in the right upgrades, as some may not result in a favorable ROI.
If looking to invest in a rental property, for instance, you’ll want to do due diligence to learn about what upgrades can lead to high ROIs. Examples of high-ROI rental upgrades include the following:
- Installing modern, energy-efficient appliances, like dishwashers and refrigerators.
- Updated countertops like quartz or granite countertops.
- A fresh coat of paint.
- Modern vanities, showerheads, and faucets.
- New lighting fixtures.
- Attractive curb appeal with features such as new fixtures, fresh paint, and landscaping.
How Can You Determine Property Appreciation?
Of course, the best way to determine whether or not a property has appreciated is by consulting with a professional appraisal.
.jpg)
This can help you find the latest sale prices for properties in a specific locale. Here is how you can do it:
- Use Zillow’s Zestimate: This will provide you with estimates of a home’s value based on the publicly available information. Including a history chart of how the value has changed over time.
- Use the Home Value Index: This can provide you with data on the average home values for a selected area.
- Use the mortgage calculator: This can provide you with current and future projections of how a property’s value is poised to change over time.
Are There Any Benefits of Real Estate Appreciation to Property Investors?
As a budding investor, real estate appreciation can benefit your bottom line in several ways. Including:
- Earning higher rental incomes: The higher the value a property has, the more rent you charge. And there is also the potential increase in rent amounts with every subsequent year.
- Enjoying higher capital gains: After selling the property, you can expect higher profits due to value appreciation over the years.
- Easy access to capital: This is especially true if you’re looking to get approval for a home equity line of credit (HELOC).
Conclusion
Before pouring your hard-earned dollars into a real estate investment, familiarize yourself with the basics first. Know the commonly used works, like property appreciation, and what they entail.
And while at it, don’t forget to involve professionals! These can make all the difference. A good property manager can help simplify your property investing journey, especially if you are looking to become a landlord.
State Property Management provides professional rental management services to property owners in Central Florida. We eliminate stress and maximize ROI; get in touch today to learn more!