Real estate appreciation means an increase in the value of property over some time.
Because of limited land resources, population dynamics, demographic shifts, economic growth, and all kinds of reasons, real estate prices are set to keep rising in the future. True, they may plummet from one year to another, but they are guaranteed to increase in the long run (10–20 plus years). This means that if you purchase a property for, let's say, $200,000 now, you may be able to sell it for $500,000 in 15 years. There are various factors on which real estate appreciation depends. We have an article below that discusses appreciation as a wealth building tool versus cash flow.
Related Article: Finding The Rental Property That Works For You
Below is an expounded discussion on the factors that affect appreciation.
If you are looking to buy an investment property and to a lesser extent if you are looking to buy a home, do not overstress the property's appearance and structure. You ought to focus on the land. Land increases in value as it ages and thus driving real estate appreciation. The population is continuously growing, and more individuals are looking for homes, more properties are getting constructed, the land rises in value.
So, if you have the option of buying a bigger and better house on a small piece of land or a small and less luxurious building on a large portion of land for a similar amount of money, go for the latter. This will bring about real estate appreciation in the long run.
Location is the second-factor determining real estate appreciation that is closely related to land. Once again, the actual physical structure is only of secondary priority. Real estate property value is a function of supply and demand, while the appearance, the maintenance of the physical structure, and the functionality have a lesser impact. Location is crucial! Location refers to various aspects – the city, the state, the neighborhood, the exact place within the community.
Locations with better economies, higher population growth, social amenities such as schools and shopping complexes, off main roads, and more developed infrastructures, are in higher demand and are also more likely to provoke real estate appreciation in the future.
Cost of Borrowing
Another essential factor that influences your property's appreciation and the whole housing market is the interest rate and the related borrowing guidelines. If the Fed raises the interest rate, individuals will be unable to afford loans, meaning that real estate prices will decline. In reverse, lower interest rates push prices up as more individuals will look for homes.
Tight lending guidelines, like those incorporated immediately after the housing crisis, disqualify any potential buyers. On the other hand, loosening these guidelines makes it easier for more people to afford a home, thus raising the prices.
Future Development Plans
Current existing infrastructure significantly impacts the market value of a real estate property. In addition, though, you should also study the commercial and government plans to further develop the location in the future.
Suppose you purchase a decent house in a not so lively suburb that is set to undergo significant infrastructural and commercial developments (connection with schools, the city, hospitals, restaurants, banks, etc.) in the next few years. In that case, you are guaranteed to gain from colossal real estate appreciation.
While you can control your property's location and physical structure, there are other factors of real estate appreciation beyond your control. One of them being the economy – the national economy, the local economy, and the global economy.
Locations within vibrant local economies appreciate more over time. Moreover, if the economy is faring well and inhabitants are employed, the demand for housing will rise, meaning that both property and land prices will go up. The global economy affects the US stock market, which in turn impacts the entire US economy.
The Physical Structure
Less attractive and small properties tend to appreciate faster. There is a simple explanation for this phenomenon, once again related to land. Say you have two houses on equal pieces of land next to each other, one of the homes being twice as big and expensive as the other. Both pieces of land will appreciate by the same amount over a certain period of time.
While the more prominent house will gain, for instance, only 10% in value, the market value of the second one will go up by 20%. The smaller, cheaper house provides a better return on investment.
We are investing in real estate appreciation for short and long-term goals.
Making Money in the Short Run
If you want to invest in real estate with the first objective of making money in the short term, then IT IS NOT ADVISABLE to invest just for appreciation. You ought to make sure to purchase a property that will give you positive and considerable cash flow. This will, in turn, allow you to increase your monthly income or save up money for a down payment on another property.
Making Money in the Long Run
If, however, you are investing today to reap your profits in the future, then IT IS ADVISABLE to invest in real estate for appreciation. There is an enormous appeal to invest in real estate for appreciation whereby that your profit will be in one single, large package that is eye-catching.
Once you get this bulk of cash, you may decide to invest it in another, larger investment property or in small ones. Investing for cash flow, on the other hand, delivers you profits in small amounts over a long span of time, and you might end up spending it without even noticing.
But there is a hack. Investing for appreciation only is risky because there is no way to be entirely certain that your real estate market prices will not drop in the next few years. Structural changes happen in the countrywide real estate market all the time, and you may fall victim to change.
Nonetheless, if you choose to purchase an investment property with the sole aim of selling it for more money in the future, ensure it will not incur a negative cash flow.
If you are interested investing in real estate check out Robert Kiyosaki's Rich Dad Summit
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