No sitting, no waiting, but still praying… only this time it was prayers of gratitude instead of prayers of desperation.
Real estate appreciation probably isn’t a new concept for you, its a tale as old as time! Buy a property for one price and sell it for a higher price. That’s real estate investing 101, right?
However, there are two types of appreciation that every real estate investor must know about: natural appreciation and forced appreciation. Even though both concepts share the same end goal (increasing the value of an investment property), they are different in other aspects.
NATURAL APPRECIATION
“An increase in the value of your real estate investment due to changes in the property market.”
In other words, natural appreciation is a very simple concept that, for the most part, you have no control over. It occurs when the demand for properties outweighs the available supply. Interest rate changes and inflation are the other major factors.
Your property can also be negatively effected if the value is determined by comparables, as is the case with single family investments. Comparables are properties that have sold recently that are comparable to the property that you’re either buying or selling. If you are selling your single family home, and a couple of your neighbors decided to sell their comparable properties for a less than ideal amount, it will negatively impact the value of your home.
I ventured into the real estate investment space in 2007 by acquiring a townhome with plans to rent it out to students and watch my property naturally appreciate over time. The first part of the plan worked, the second part not so much. A few months after purchasing that property the real estate bubble popped and my fellow townhome owners either started getting foreclosed on or selling their property for pennies. My property value started going the wrong way almost over night and didn’t stop. That property was upside down in value for nearly a decade, and though I was always cash flow positive, I felt helpless when it came to increasing the property value. All I could do is sit, wait, and offer up prayers of desperation.
FORCED APPRECIATION
“An increase in the value of the real estate investment property due to the investors actions.”
Forced appreciation is not influenced by uncontrollable market forces, it’s influenced by the investors proactive and tactical strategies. In other words, it’s within our control. This was wildly attractive to me because I’m a bit of a control freak… especially when it comes to wealth creation.
This is what leads many real estate investors, myself included into the fix-and-flip game. Buy a distressed property, fix it up, and sell it for more. You’ve forced the appreciation by renovating and improving the value of the property. Sounds great, but I quickly realized that, because of how single family properties are valued (by comparables), the value of the property could still be dramatically influenced by market forces. This, amongst other things, is what drove me to multi-family.
Multi-family properties are valued by the income that the property generates. Which means if we can find ways to increase the income, we will FORCE the property to appreciate in value. Even if a nearby comparable property gets into trouble and sells for pennies, the valuation of my asset won’t be effected, because the value in this asset class is determined by income, not comparables.
For example, we recently purchased a little 40 unit building in Mooresville, NC, just north of Charlotte. The property was 100% occupied but rents were approximately $300 below market value. Over the past 18 months we’ve been able to implement proactive and tactical strategies like raising rents, decreasing expenses, and dialing in the operating procedures to FORCE the property to appreciate by approximately $1.5M.
No sitting, no waiting, but still praying… only this time it was prayers of gratitude instead of prayers of desperation.
Forced Appreciation > Natural Appreciation.
