Appreciation is the increase in value of a property – whether through renovations, market cycle, or location. Most people automatically think of an area becoming “hot” as the reason for rising values. Think of market appreciation as passive… you don’t have to do anything to earn it.
But there is another way to play the appreciation game. “Forcing” appreciation is more active. You actually DO something in order to create additional value. Imagine pushing your property’s appreciation up a hill… sweat equity required!
In single family properties, value is based on recent sales of nearby houses that are in similar condition (the comps). The objective is to buy a physically distressed property and force an increase in value by doing renovations. From updating the kitchen, bathrooms and fixtures to increasing the square footage, adding a bedroom or tearing down walls to create an “open concept,” – all these things can increase the appeal to your end-user (the buyer) and ultimately increase the sales price. The rehabbers you see on HGTV utilize this type of forced appreciation.
If you want an increase in value for your house, but don’t plan to do any updates, you are basically hoping for market appreciation. The problem is, if the properties around yours start selling for less, then yours will lose value too.
That’s why its extremely important to be ‘dialed-in’ on what’s going on in your market, so you can try to spot these kinds of shifts before they happen.
On multifamily properties (5+ units), value is based on Net Operating Income of the property, NOT on what the building down the street sold for. The higher the net income, generally the higher the property value.
Therefore, to force an increase in value, you have to employ strategies that will increase the income and/or decrease the expenses.
Adding amenities that will increase rents, implementing utility bill-backs (i.e. RUBS), improving property management, decreasing utilities by installing LED lights or low-flow toilets are all means to increase the NOI.
This is why you have more control of your multifamily’s value than your single family’s value because of the dependency on market sales.
Now I will add, it’s prudent to buy in an area that is experiencing growth, no matter what your target property-type is. An increase in jobs and population leads to an increase in housing demand, and then to sales and rental prices – so your multifamily’s NOI and subsequent value will still experience growth!
Do you have any additional ideas or questions about forcing appreciation in real estate? What are some other areas of your life where you can force appreciation?
As always, don’t hesitate to reach out, I’d love having a conversation. Until next time… invest wisely!