If you’re like many real estate investors, you’ve heard of forced appreciation. But what is it, and could it be the right approach for you? This guide explains forced appreciation in real estate so you can make the best choices for your property and your profits.
What is Forced Appreciation in Real Estate?
Forced appreciation involves you controlling the value of your investment property by increasing your net operating income, or NOI. You can increase your net operating income by decreasing your operating expenses or increasing your rental income. The choice is yours, but the reality is that you don’t have to sit by and settle; you can take a proactive stance and make your property a solid investment.
How is Forced Appreciation Different From Natural Appreciation?
Forced appreciation involves you making your property a better investment, while natural appreciation simply depends on the market to increase your property value. Natural appreciation only occurs when the demand for rental properties increases; otherwise, the value of your property will stagnate. You have no control over natural appreciation.
However, you do have control over forced appreciation. The following sections explore the benefits and downsides of forced appreciation.
Are There Benefits of Forced Appreciation?
Most investors find that there are several benefits of forced appreciation. Primarily, the biggest benefit is that the investor has control over increasing profits. Forced appreciation means higher returns now, rather than waiting years for a property to naturally appreciate in value.
Here is one small example: If you were to increase your monthly rental rate by $20 on a 100 unit property, your monthly income goes up by $2,000. Over time, that makes your property more valuable and more attractive to other investors should you later decide to sell it. Remember, though, you must justify increases. In that way, forced appreciation can cost you a little bit for far larger returns over time.
What Are the Downsides of Forced Appreciation?
Often, investors see the main drawback of forced appreciation as being a one-time benefit. Often, though you may see increased monthly returns, you won’t see the biggest profit until you decide to sell the property later.
5 Simple Ways to Force Appreciation
Check out these five simple ways to force appreciation on your investment property:
- Minimize vacancy rates. The more units you have occupied, the more money you will make. Try to minimize your vacancy rates as best you can. If that means hiring a property manager to advertise vacant units, then so be it.
- Increase monthly rent. You can raise your monthly rents, but only in reasonable increments and only if the increase is justified. Otherwise, your tenants will be unhappy and move out. Then you’ll be back at square one.
- Convert space to something usable. In smaller properties, one of the best ways to increase a property’s value is to convert unused space into something useful. For example, if there’s an unfinished basement, an attic that could use some drywall to become a special hobby room, or even unused space under the stairs, you can do your best to make that space useful and increase your property’s value.
- Add on. Adding additional bathrooms, bedrooms or other spaces can increased the value of your property. However, these are typically large scale investments, and they won’t pay off immediately.
- Boost curb appeal. The more attractive your property is, the more valuable people perceive it to be. People rent based on emotion, so you want them to have a great first impression of your property. Take the time to make the space look amazing from the outside. That way, the people viewing your property will be excited to see what’s inside.
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