What is appreciation?
Ever notice how some properties increase in value every single year? That’s called appreciation. When a property appreciates, investors like you make a bigger profit when selling it or renting it to tenants, which is one of the benefits of investing in real estate! If you have a home loan, an appreciated property creates more equity, which means there’s more cash available if you want to build your real estate portfolio.
So why do some homes appreciate more than others? There are several factors behind this phenomenon. Real estate agents calculate the value of a home based on comparable homes in the same neighborhood or area. In a hot housing market—one where there are fewer homes for sale than buyers—properties can dramatically increase in value. That’s because there’s more demand for these properties (known as a seller’s market), so investors can make greater profit margins if they choose to sell a home or rent it to tenants.
There can be other factors at play. A home might appreciate in value if located near a new development such as a train station or shopping mall or if an area has good schools or local amenities. A home might also increase in value if the owner has refurbished the property. Some renovations like a kitchen and bathroom remodel can add thousands of dollars to a property’s asking price.
Did you know that the overall economy can also influence property prices? When interest rates are low, more people might be interested in buying properties, increasing the value of homes across the board. And when interest rates are high, the opposite can happen.
Appreciation is the opposite of depreciation, in which a property decreases in value over time. That might happen when a home is close to a high-crime area or if a property has sewage or structural problems. Sometimes a natural event like a fire or bad weather can depreciate a home’s value overnight.
So what does this all mean for you as an investor? Purchasing a home in an up-and-coming location or refurbishing an old property could lead to bigger profits when you sell or rent your investment. Sharp investors consider various appreciation factors when buying real estate.
Appreciation case study
A real estate investor buys a foreclosed property in a bad state of repair for $150,000 with a home loan. She renovates the property by adding a new roof, new windows, and an additional bedroom and bathroom. Because of these repairs, the home appreciates in value and is now worth $250,000. That means the property now has equity, allowing the investor to invest in a second home and expand her real estate portfolio.
The bottom line
Appreciation happens when a home increases in value over time. That might be because the homeowner made renovations to the property, or the demand for similar properties in that area has increased. When a property appreciates, an investor can generate more rental income or sell the property for a higher price.