When you invest in real estate, “Appreciation” is an important term that you’re bound to hear
At the surface level, appreciation means an increase in value over time according to the DOJ. The same is also true when it comes to real estate. But how exactly can real estate appreciation affect you as an investor?
How Does Appreciation Happen?
In real estate, appreciation occurs when a property increases in value over time. The value isn’t fixed and fluctuates either by going up or down.
Real estate appreciation can occur either organically or through upgrades. When it occurs organically, it does so naturally with the laws of supply and demand being the driving force. When the demand goes up, property values go up as well. And during periods of low real estate demand, values dip meaning the property depreciates.
The other type of real estate appreciation is when it occurs as a result of upgrades. An example would be when an investor buys a distressed property and makes improvements. The property would increase in value, especially if the improvements have a high return on your investment property.
Factors That Affect Real Estate Appreciation
Here are the following factors that affect appreciation:
Housing Demand
As already mentioned, organic real estate appreciation respects the rules of demand and supply. When housing demand rises, the more property values increase, and vice versa.
A high housing demand simply means that the number of potential buyers exceeds the number of sellers. In real estate circles, such a market is referred to as a seller’s market.
The opposite is also true. A low housing demand means there are more sellers than there are buyers. Such a market is referred to as a buyer’s market. In such a scenario, sellers often have to “give in” and sell their properties for less.
Mortgage Interest Rates
These have a great impact on housing values. When interests on mortgages go high, it makes it harder for buyers to buy new homes because they become unaffordable.
And when interest rates on mortgages go down, they encourage buyers to buy new homes. This helps increase housing demand and property prices.
Local Housing Market
Local factors also play a huge role in real estate appreciation. In real estate investing, appreciation occurs differently depending on a specific area. For instance, a house located in a highly sought-after school district will usually appreciate quicker than one in a location where the school district has a poor reputation.
Property Upgrades
Property upgrades will also have an impact on real estate appreciation. High-quality upgrades will lead to appreciation in real estate, and vice versa.
As a landlord, for example, property upgrades that can lead to a high return on investment include the following
- Modernizing the kitchen.
- Remodeling the bathroom.
- Painting walls with a fresh coat of paint.
- Upgrading to energy-efficient lighting.
- Maintaining the driveway and walkway.
Benefits of Real Estate Appreciation
As a potential investor, real estate appreciation can benefit your bottom line in multiple ways. The benefits include the following.
- Passive Income: Enjoy a consistent stream of extra income. If you invest in an area with high demand, you can guarantee yourself a high ROI. The high ROI can be in terms of low tenant turnover and higher rents.
- High Capital Gains: The higher the rate of appreciation in an area, the more profits you can realize after selling the property.
- Quick Approval From Lenders: This is especially true when it comes to accessing a home-equity line of credit (HELOC). A high property value can help you access more credit if you choose to liquidate some of its value.
- Equity Build-Up: As the value of a property rises, so does the equity in the property. Equity is the difference between the value of the property and the mortgage debt.
How to Determine Rate of Appreciation
Ideally, if you are looking to know the exact rate of appreciation of a property, hiring a professional appraiser is your best bet. They will analyze the rate of appreciation using various metrics, including comparable sales analysis, market trends, and historical appreciation rates.
However, for a simplified overview, you can go online and use trusted real estate websites like Zillow. The following are some of the steps to take.
- Go to your search bar and type https://www.zillow.com/homes/. Enter the address of the property or the ZIP code in the search bar.
- After you have found the property, view the Zestimate. This will be the estimated value of the property as per Zillow.
- Check the historical trends. This is a visual representation that can help you see how the Zestimate has changed over time.
- Analyze the data. If the home has appreciated, the Zestimate will be in an upward trend. A downward trend may suggest depreciation. This can help you know how the property is performing in the local housing market.
Generally speaking, though, appreciation rates have slowed down. This has been due to things like rising mortgage interest rates and high inflation. The result is a decreased housing demand, which has slowed down appreciation rates.
Conclusion
When looking to invest in real estate, due diligence is key to success. It’ll be in your best interest to know as much about the housing market as possible. One of the things to keep in mind when looking to invest in a property is the appreciation rates. Go for areas that have high potential for high appreciation rates for a high return on investment.
For expert help in real estate investing, look no further than Home Choice Property Management. With over 10 years of experience in the Southern California rental market, we can help you make a sound investment decision. We can even manage it for you as well for optimal return on investment. Get in touch to know more!