We have seen the phenomenon that is appreciation in play over the years, allowing you to increase your income. We have been in the property market for several years and can aptly explain its importance and its effect on your investment.
Our able team has compressed its knowledge to this short article to explain to first-time and experienced investors about appreciation.
What is Appreciation?
Appreciation refers to the increase in value of a property. What you will have to acknowledge about appreciation is that it is not an instant element. It takes time as push-pull property factors fluctuate and change over time to your advantage.
There are two types of appreciation that one should know about:
Organic: this appreciation is the one typically known where demand and supply factors lead to a shortage of supply and thus an increase in value.
Forced: this type, as the name suggests, is where a property owner makes changes to a property to increase its value. This is common in the purchase of distressed or foreclosed properties. Investors purchase such properties, make significant changes, and put them back on the market at higher prices.
Unfortunately appreciation is not a given factor in a property market. You can also experience a loss in value, which is known as depreciation. It can also happen in localized markets should market variables change drastically leading to a change in demand and thus in value over the long-term.
Factors that determine the appreciation of a property
We need to analyze the variables that affect the appreciation on an asset:
Housing Demand
At the most basic level, the balance between housing demand and supply determines the appreciation of an asset. Price equilibrium is determined where the level of demand meets that or supply. With a higher demand for property, we should expect an increase in price and thus increased value of the asset.
The balance of housing demand and supply creates two scenarios; a buyer’s market and seller’s market. A seller’s market is where demand exceeds supply; there will be more buyers for property than options to buy in such a market. You will typically expect property appreciation here.
On the flip side, a buyer’s market is where the supply for property exceeds the available buyers. Here the buyers have the advantage and can buy a property below market value.
Local Market
From our experience in the property market, we have come to acknowledge the localized nature of the industry. Local factors in an area or a region will have an effect on its performance. This is because of the different rates of growth, demand factors, population growth, impact of fiscal policies, infrastructure, and many more.
A good example would be the passing of an infrastructure bill that suddenly increases the demand for housing in an area. This local variable will cause appreciation in the subject county despite there being an opposite scenario in the next county over.
Interest Rates
Once you get into the investment market, you will appreciate the capital cost of property purchase. Even the most affordable options will set you back a hundred thousand dollars. Most investors don’t have that cash up front and will rely on financing/mortgages for part of the purchase price.
This is where the interest rates come in. The rates are the cost of business for doing business with the bank and using the money. And these rates are not fixed. Should there be a fluctuation in the mortgage interest rates upwards, this will have an impact on housing.
Higher rates means that fewer potential buyers are able to invest in the market and purchase a house. With less demand, you can expect an impact on property prices. The reverse of that is also true.
Improvements and Renovations
The impact of improvements on value is higher in old and established neighborhoods known for more aged amenities and fittings.
But it should be noted that not every improvement would increase the value of the property. We encourage property owners to have discussions with either an experienced appraiser or a real estate agent. They would be able to advise the company.
Conclusion
Knowledge of property appreciation is instrumental to your performance as a real estate investor. You will be able to do quality resrch and invest in areas that have the potential to appreciate massively over the years. You can also choose to go the ‘forced’ route and still enjoy capital gains from your property.
If you have any questions don’t hesitate to contact SGI Property Management today! We are a full-service property management company offering comprehensive and customized solutions to our clients.
