What is Appreciation
One of the questions I get asked a lot is what is appreciation?
No, it’s not a nice recognition for doing something well where people appreciate you.
Appreciation in real estate means where your property actually increases in value.
There are two ways properties increase in value. Well, there are at least two ways in which properties increase in value.
Market Appreciation
The first one is just by market appreciation. Over time, you are going to have a property. Let’s say you paid $200,000 for it. And after a year, the market’s gone up meaning the house prices in the area are higher and people are paying more for those kinds of houses. Now that $200,000 property, maybe it’s worth $205,000 or $210,000 after a year. Or maybe after five years, it’s worth 250,000.
The difference between what you bought that property for, which was the $200,000, and what it’s now worth at the time which is $250,000 is $50,000. That is the appreciation that the property has incurred.
The bad thing is that, depending on what the situation is and where the property is located, and what is happening right now with this pandemic, the property could have decreased in value. That is called depreciation.
When the property is worth less than what you originally paid for, they call that organic depreciation, meaning you had nothing to do with that.
It was the surrounding market values that, that affected the appreciation or depreciation.
Forced Appreciation
You can actually force the appreciation. The way you do that is through renovations and through changes that you make to the property that you bought.
For example, let’s say you buy a property and the market value is $300 000, but you get that property for $200,000 because it’s rundown; and it needs a lot of work.
What you can do is you can go in and make changes to increase the value of that property.
A few changes might be upgrading the kitchen, the bathrooms, or maybe putting a basement apartment in and so on. Then you want to look at the surrounding area and ask yourself: will those changes increase the value of the property?
Now that $200,000 property you bought is worth $300,000. You forced the appreciation by making the changes to that property.
Now let’s say you bought it for $200,000, you put $50,000 into it, and it is now worth $300 000. The appreciation is a $100 000 that you’ve forced for that property, although it cost you $50,000 to do it. Your net appreciation would be $50,000 in that case.
You want to make sure that when you buy properties you understand the appreciation and that there is the ability to either appreciate the property through organic or forced appreciation.
