Appreciation is the rise in the value of a real estate investment over time. By the end of this article, you will know how it works and how to use it to your advantage.
What’s the difference between appreciation and inflation?
Appreciation occurs whenever an asset’s intrinsic value increases i.e., only when it becomes more desirable, valuable, or useful.
It is the sort of trend that would occur in any of the following scenarios
- If you own real estate in a town that has grown more popular than it was when you purchased the property, and many people are moving there (thereby increasing demand for a constant supply).
- If you find rare mineral deposits on your land.
- A prominent corporation announces that it’s building a facility a short distance from your house that will employ about 6,000 people (they’ll need places to live in).
In all these scenarios, despite what’s going on in the greater economy, your property will be in higher demand – leading to appreciation. This “appreciation” reflects a change in the asset itself.
Inflation can look a lot like appreciation, yet it isn’t – not really. As we’ve discussed before, it occurs when the number of pounds or dollars one has to exchange to purchase a property increases. Inflation does not reflect any changes in the asset itself.
Instead, it reflects a decrease in purchasing power of the currency you’re using to purchase the asset. In simpler words, the asset isn’t really worth more; it’s just that your money doesn’t have as much purchasing power as it used to, so you have to give more of it to get what you want.
Types of real estate inflation
Imagine owning a 30-year old home in London. That property would be worth a lot more than it was 30 years ago (provided that it is in a desirable neighborhood). In fact, there are several real-world examples of properties tripping in value over a few decades. This sort of appreciation is defined as natural appreciation.
The investor or property owner has no control over it. Instead, the asset will gain value over time due to the principles of supply and demand. As the population grows, development expands, the need for land increases. The resulting shortage leads to a rise in price.
Forced appreciation occurs when an investor engages in activities that directly increase a property’s value, like renovations and home staging. It is largely isolated from large-scale market forces.
factors that affect real estate appreciation
Demand and supply
Supply and demand are naturally occurring market forces in capitalistic economies. When the need for homes increases, their value increases and continues to do so until new residential units are built to satisfy the excess demand.
Buyers will look for homes in affluent locations that are close to markets and urban centers. Properties in these areas will enjoy higher demand and prices as a result.
Property market drivers
real estate appreciation rates are also affected by developments that have a positive effect on their location. Plans for new infrastructure like roads, airports, office complexes, shopping malls, and so on will encourage people to move there.
Government policies like lending rates have a direct impact on appreciation. When it’s easier to borrow, more buyers enter the property market. This creates more demand, leading to appreciation. Stamp duty rate reductions and changes to circle rates and income tax benefits have a similar effect.
A property will appreciate if the local neighborhood and social infrastructure encourage growth.
How to make a property appreciate faster
Make it more beautiful
The easiest way to make your property appreciate is to make it more attractive through home staging. It may seem trivial but, it isn’t. Surveys have revealed that home staging can affect the prices buyers are willing to pay by 1 and 5%, compared to similar homes. So, if your property is worth $400,000, home staging could improve its value by $4000 to $40,000.
Add living space
Bigger homes usually fetch higher prices. have a look around your property. Do you see any non-load-bearing walls you could take out to make the house feel more spacious? Is there an area in your home where adding a bathroom would make things more convenient? Changes of this sort will significantly increase your asset’s value. However, you should keep in mind that home renovations often cost more than a property’s resale value. Here’s how that works
let’s say you want to install a bathroom with a fairly beautiful shower, sink, and toilet. While the project could add nearly $30,000 to your home’s value, the cost could be as high as $50,000. So, you will likely lose some of the money you’ve invested (if you sell immediately). Make sure the renovations you add to your property fit within your overall budget and investing strategy
Make your property energy efficient
Individuals and businesses will pay more for properties with enhanced energy performance, as it provides benefits like improved productivity and reduced operating costs. Studies by the UK government department of energy and climate change have revealed that having an energy performance certificate (EPC) can add significant value to a home. The average residential house in the UK could enjoy 14% appreciation if its rating is improved from G to D.
Appreciation is one of the best ways to earn from real estate, and though we’ve covered quite a lot on the subject in this article, there’s still more for you to learn. Momentum property education has a great selection of property investment courses to help you excel in this skill and many others.
Join us today to learn from a team of accomplished and experienced property investors.