"Appreciation" is a key term every smart investor should understand. At its core, it means an increase in property value, but there’s more to it than that!
Before jumping into real estate investing, it’s important to understand appreciation and how it can impact your investment.
Knowing how appreciation works helps you make smart investments that will grow in value over time. Keep reading to learn more!
What Is Real Estate Appreciation?
When a property appreciates, it means that its value has gone up vis-a-vis the buying price. The price rises steadily over some time, and can also fluctuate by sometimes going downwards. Appreciation usually occurs in either of two ways: organic or forced.
Organic appreciation happens naturally when the forces of supply and demand are working. When demand for real estate goes up, so do the prices. Contrastingly, when supply goes up, the values dip. In this case, the property is said to have “depreciated” in value.
Forced appreciation is when an investor forces an increase in property value. An example of this would be how fix and flip properties work.
As an investor, you buy a distressed property, say, for $100,000 in a desirable neighborhood. You remodel the kitchen, replace the roof, paint the interior, and do other necessary renos.
Consequently, these renovations end up raising the property’s value to $150,000 from $100,000.
What Factors Can Affect Real Estate Appreciation?
Several things can affect real estate appreciation. They include:
Demand for Housing
The more demand for housing in a particular area, the higher the prices will be, and vice versa.
When demand for housing is high, it means that there are more buyers than sellers. In other words, it is a seller’s market, where there is increased competition among buyers, and only the highest bidders win.
In a buyer market, however, the opposite is true. The supply of housing exceeds the demand from buyers. Houses can stay on the market for weeks or even months. Buyers get an advantage over sellers, and buy the house for less.
Rate of Interest
Another factor affecting appreciation values is the mortgage interest rate. This can affect how affordable homes are.
The higher the rate of interest, the more difficult it’ll be for buyers to obtain financing for their home purchase. This reduces housing demand and property prices go down.
On the other hand, lower interest rates mean more buyers will be able to access mortgage financing. This pushes up housing demand and property prices shoot up.
Location
Location is everything when it comes to real estate. And this is also equally true when it comes to the rate of appreciation. Often, the better the property’s location, the higher the rate of appreciation, and vice versa.
Also, no two locations are ever the same when it comes to real estate. It’ll be different in certain states, cities, and even neighborhoods.
Upgrades
Property upgrades can also affect the rate of appreciation. This is especially true if you choose the right ones, as not all property improvements lead to an increase in property value.
If you're unsure which upgrades to make, seeking expert advice is a smart move. For rental properties, a property manager can help you choose upgrades that increase value and attract tenants.
They can also assist with addressing maintenance issues, ensuring your property stays in great condition and preventing costly repairs down the line.
With professional guidance, you can focus on budget-friendly improvements that maximize your return on investment while keeping tenants happy.
How to Know the Rate of Appreciation of Real Estate?
You have two options for determining real estate appreciation. One is to hire a real estate appraiser, who will consider factors like recent sales, home amenities, and renovations.
Alternatively, you can research on your own by using sites like Zillow and Trulia. Be sure to focus on properties with similar features to yours, such as the same number of bedrooms, bathrooms, and square footage.
National appreciation rates have fluctuated over time. For instance, from Q1 2023 to Q1 2024, prices rose from $505,300 to $519,700, but recent trends show a slowdown. In Q2 2024, property prices dropped to $501,700.
Appreciation rates are influenced by market conditions and global events. The pandemic caused a surge in housing demand, while 2024 has seen a decline due to inflation and rising interest rates, which have slowed housing demand and appreciation.
Why Care About Real Estate Appreciation?
As an investor, inflation rates are sure to have an impact on your investment. With high appreciation rates, you can enjoy the following benefits:
- Increased income from your rental property. The higher the property value, the more rent you can charge. This can ensure you get a steady passive income over a lease period as long as you rent to a great tenant.
- Increased profits when you eventually sell the property. The more the appreciation rate, the higher the capital gains you’ll get to enjoy when you sell the property.
- Increased chances of getting approved for a HELOC (home equity line of credit). The increased property value can help you borrow more from lenders.
Conclusion
Familiarizing yourself with important real estate jargon like “appreciation” and what it entails is key to your real estate investment journey. You’ll get to know which areas to invest in, and what upgrades to make for a high ROI, among other things.
But equally important, however, is working with a professional. And this is where Schambs Property Management comes in. We have the know-how, resources, and experience in Wake County, NC to help you make the right decision. Get in touch to learn more!