Real Estate Investing: What is Forced Appreciation?
Appreciation isn’t a new concept, but are you aware that you can control it? Property investors tend to assume that property values are dependent only on market values. They take into consideration the annual appreciation rate of their properties in calculating their return on investment (ROI). If a property is potentially profitable, it’s then considered an “ideal” investment. If it isn’t profitable, it’s put aside.
The problem with this is that it’s what every investor is doing. The solution? To invest in properties that don’t seem like profitable investments. This, however, doesn’t mean you should purchase properties that are in terrible condition. The trick is to invest in promising properties.
In this article, we’ll introduce to you the concept of forced appreciation. It’s the secret of smart landlords to “speed up” the process of appreciation.
What are the types of real estate appreciation?
To understand forced appreciation, it’s important to take a look at the two types of appreciation: natural appreciation and forced appreciation.
Natural appreciation or market appreciation is dependent on the real estate market. This is when a property appreciates due to the rising demand for property in a particular location. It can also be caused by changes in inflation or interest rates. Natural appreciation is uncontrollable, although you can predict it through property analysis.
For example, if a college campus is opening not far from your single-family home, this can cause the demand for rental properties to rise. As school starts, more and more students will need a place to stay. Hence, this triggers the natural appreciation of your property.
Forced appreciation “speeds up” the appreciation process. After all, who wants to wait years for the property to naturally appreciate?
It refers to the rise of real estate values due to the investor’s actions. It is when the property investor, together with their property management company, makes proactive moves to impact the appreciation of the property. In other words, forced appreciation offers the investor complete control.
By forcing your property to appreciate, you can increase your rental income in a shorter period of time. Who doesn’t want that?
How can you force your property to appreciate?
So, how exactly can you “force” your property to appreciate? In this section, we’ll take a look at some of the solutions for forced appreciation:
#1 Raise the Rent
Want to increase your rental income? The simplest solution would be to raise the rent. Each year, you should change your rent charges by comparing your rates to your competitors. You shouldn’t charge rent that’s ridiculously high at the risk of losing renters. Your rental rate should always be reasonable so that you don’t have to deal with vacancies.
Pro Tip: Remember, you can’t raise the rent to whatever amount you want. A property management firm can figure out the right rent increase so that you don’t get in trouble.
#2 Add More Living Space
Rental properties that have more space tend to attract more tenants. You could also charge higher rent. By converting the basement into another bedroom, you could potentially raise your rental income. Similarly, by turning a one-bedroom unit into a two-bedroom unit, tenants will be more willing to pay for the space. Remember, rental rates aren’t solely based on square footage.
Pro Tip: If you’re DIY-ing your renovations, don’t forget to have them inspected by professionals to ensure that they’re up to code.
#3 Enhance the Curb Appeal
How your home looks from the outside matters to your potential tenants. Flourishing flowers, trimmed trees, and a clean storage shed can cause your property to appreciate. The reason is that people are often willing to pay more for an aesthetically pleasing property. If home improvement isn’t your strong suit, you can always work with a professional property manager.
#4 Add ‘Spares’ to Your Single-Family Home
Consider adding spare bedrooms and bathrooms to your single-family home. This will attract more tenants, especially if similar properties in the same area don’t come with these spare spaces. Providing them with more rooms increases their willingness to pay you more money. Similarly, you can increase the rent in your multi-family property by adding amenities such as a laundry room.
#5 Be Proactive with Maintenance
As a property investor, you should be proactive when it comes to property maintenance. By doing this, you can ensure that your property is in its best condition 365 days a year. You can do this by attending to problems as soon as possible. For example, if you notice that the roof needs repairs, you should call a contractor to have it checked. This prevents small issues from turning into costly complications.
Pro Tip: A property management company can conduct regular inspections to check if the property requires repairs.
What is the disadvantage of forced appreciation?
One of the disadvantages of forced appreciation is the time you have to spend monitoring the market. This is especially true if you aren’t a seasoned real estate investor. However, once you get the hang of things, you’ll be able to “force-appreciate” other properties pretty quickly.
Another disadvantage is that it requires a lot of research. To make sure that a property is promising, you’ll need to spend a lot of time researching the property and its location. You’ll have to stay up-to-date on infrastructural developments that may impact property values. This means you need to be willing to put in the extra effort.
Fortunately, you don’t have to deal with these disadvantages on your own. A property management company such as Luxury Property Care can handle the hard stuff. All you have to do is to see your rental income increase.
The bottom line
As a full-service property management company, Luxury Property Care’s primary responsibility is to ensure that your property constantly generates great profit. In fact, you could say that forced appreciation is our focus. With us, you don’t have to depend on uncontrollable factors to determine the future of your property. Our property managers will make sure that your property stays profitable for as long as possible.