What is Appreciation in Real Estate?

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Choosing to be a real estate investor means a lot of skills, terminology, and statistics to become acquainted with. Thoroughly understanding the industry will give you a huge advantage while dealing with it.

One of the many benefits cited of investing in real estate has to be its consistent appreciation in value. From your research, you have a basic understanding of what appreciation is; the increase in value of an asset. Do you know how it affects your assets in the long run?

If not, don’t worry! The team from McKenna & Vane Property Management is here to unpack for you everything in a simple manner.

What is the Meaning Behind Appreciation?

Property appreciation, as mentioned above, occurs when there is an increase in the value of your property. Appreciation takes time, however, and is not a random overnight phenomenon. This can be attributed to the dynamics that affect property as an asset class.

The property industry is a unique one compared to other investments because it is an immovable asset. Its value is derived from other factors and elements surrounding it. For example, demographic changes, the local economy, employment opportunities, or changes in housing stock. All of these factors play a role in the appreciation of the value in the grand scheme of things.

Rows of miniature houses

One common misunderstanding is that property constantly appreciates in value. This is not always the case. Due to negative changes in the mentioned factors that could lead to a decrease in demand, there could be a loss in value. This is also known as depreciation.

There are two types of appreciation:

  • Organic: This is a natural change that occurs over time, taking into consideration the laws of supply and demand. In this form, the demand for property outstrips the supply. As a result the value of the property increases.
  • Forced: This type of appreciation occurs when the proprietor renovates and makes changes to the property that lead to an increase in value. It is often the case in fix-and-flip houses. Investors purchase distressed/foreclosed properties, improve them, and put them back on the market.

Elements That Influence Property Appreciation

You will need to know of the factors that affect real estate appreciation. As an investor, this is what you should be on the lookout for as you make your purchase. Look for these important factors as you analyze different markets and make an informed decision that will give you an upper hand.

Demand

The higher the demand for housing in a particular area, the higher the price newer buyers will have to match. And this applies to the opposite scenario. Buyers will try to outbid other potential buyers who are competing for the same product.

Several rolled up American dollar bills.

You must also note the fact that housing demand varies across different property types. Demand for single-family residences in an area will not automatically mean a similar demand for condos in the same area.

Interest Rates

Few assets can match the initial investment cost required to buy a house or any other type of property investment. Even in the most affordable markets, you will still have to part with hundreds of thousands of dollars.

Most investors rely on a mix of part equity, part mortgage to afford a house. Therefore, investors will keep a keen eye on the fluctuation of interest rates. Higher interest rates mean higher monthly repayment plans for new buyers. Fewer people would qualify for mortgages meaning less demand and in the long run no or slow appreciation.

The Local Market

As mentioned briefly above, a property is a location-fixed asset. It is immovable and therefore its value is derived from its surrounding factors and elements.

Changes in the neighborhood could significantly increase the demand. This could be the opening of an internationally accredited school or the development of a multi-user shopping complex a few blocks away.

Improvements

We mentioned the second type of appreciation is forced appreciation. Here, you have to match the renovations made to the needs of your target market.

A selection of paint and countertop swatches.

If your target tenant market is families, you will have to consider their property needs. For example, families are more interested in spacious kitchens, wardrobes to bedrooms, and well-fitted bathrooms.

How Much Has My Property Appreciated?

If you’re looking for a general estimation, you can use popular listing sites. to find similar properties to yours. Make sure to find a like-for-like match to be the most realistic. This, however, will not be an exact position of your property’s value.

We would recommend that you hire the services of a professional appraiser. They’ll be able to assess the various factors affecting your property expertly and advise you, given recent transactions that have occurred in the market.

Benefits of Property Appreciation

Below are some of the benefits that you stand to gain from property appreciation:

  • Higher passive income. You’ll be able to lease your property for more given a higher appraisal value.
  • Capital gains. Capital gains are the profits that you stand to gain from the selling of your property. With appreciation, your capital gains increase substantially.
  • Greater liquidity. Should you want to get more liquidity from your property (in the instance of HELOC), an appreciation works in your favor.

Conclusion

Knowledge of real estate, its terminology, and market conditions is important to give you an understanding of the industry. You will also be able to make an informed decision and operate from a position of strength.

Do you want to invest in Carroll, Howard, Anne Arundel, and Montgomery Counties? There is only one company you should trust for reliable and expert advice. McKenna & Vane Property Management is the leading Maryland property company with the experience and expertise to guide your investment.

Get in touch with us today!