Dec 13, 2019
Real estate appreciation refers to the increase in the value of an investment property over time. There are two possible ways this increase can happen: through natural/market appreciation and through forced appreciation. The annual appreciation rate of your real estate property is important when calculating the return on investment. Therefore, real estate appreciation is a variable which plays a key role in defining the profit from an investment property for a real estate investor.
However, what is forced appreciation? First let's point out that forced appreciation doesn't work for a house or with the building less than 4 units. These units are valued by comparables with like properties in like neighborhoods.
Forced appreciation refers to the increase in the value of the real estate investment property due to the investor's actions. This means that this type of appreciation is not influenced by the uncontrollable market forces. Rather, it is only the real estate investor who, through proactive engagement, can have an impact on the forced appreciation of an investment property. The property value equals the net operating income over the cap rate. Simply put, increasing the property value means having higher NOI.
Therefore, there are two possible ways to make money using forced appreciation.
These are, namely, increasing the rental income and decreasing the expenses of the real estate investment property.
Back in 2012, we bought a 144 unit complex and it definitely required renovation and updating the units. So we strategically renovated the building as tenants moved out and also gave out rent increases to an average about $100/unit.
With that scale, increased our property value by over $2 million dollars. So we were able to refinance in 36 months and paid out our investors and had a nice pay day for ourselves.
We have also bought the buildings which are turnkey. The sellers have done all the renovations and then sold it to us. So you don't get the forced appreciation right away. But on the other side, you can decrease the expense on the property over the years and then you will be able to refinance it and get forced appreciation.
So that is why forced appreciation is so important. Forcing appreciation is for sure challenging but extremely rewarding when done properly.
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