Real estate appreciation refers to the increase in the value of an investment property over time. There are two possible ways this increase can happen: through natural/market appreciation and through forced appreciation. The annual appreciation rate of your real estate property is important when calculating the return on investment. Therefore, real estate appreciation is a variable which plays a key role in defining the profit from an investment property for a real estate investor. However, what is natural/market appreciation and how does it differ from forced appreciation? What are the best tips for forced appreciation in real estate investing? Find the answers below.
Natural Appreciation vs. Forced Appreciation
Natural or market appreciation is an increase in the value of your real estate investment due to changes that occur in the real estate market. Such increase may happen when the demand for investment properties as yours overweights the supply. Moreover, natural appreciation may happen due to changes in interest rates or inflation. Let’s imagine there is a new university opening near the location of your real estate investment. Consequently, there will be higher renting demand when students come to study there. This will result in natural appreciation of your investment property. However, if a business closes down, many people will look for work somewhere else. Thus, the demand for rentals will be lower compared to the supply. The latter will result in the so-called depreciation of your rental property.
A real estate investor does not have control over the impact of natural/market appreciation on his/her investment property. Nevertheless, the real estate investor can control the success of the real estate property through forced appreciation.
Forced appreciation refers to the increase in the value of the real estate investment property due to the investor’s actions. This means that this type of appreciation is not influenced by the uncontrollable market forces. Rather, it is only the real estate investor who, through proactive engagement, can have an impact on the forced appreciation of an investment property. The property value equals the net operating income over the cap rate. Simply put, increasing the property value means having higher NOI. Therefore, there are two possible ways to make money using forced appreciation. These are, namely, increasing the rental income and decreasing the expenses of the real estate investment property.
Tips for Forced Appreciation in Residential Real Estate Investing
In this section, we will review some of the possible tips and tricks for forced appreciation in residential real estate investing.
Increasing the Income
#1 Raise the Monthly Rent
Raising the monthly rent seems like an obvious answer. Many real estate investors, however, set up a rent and forget to update the asked price. When considering raising the monthly rent of your real estate investment, be sure that the newly updated price is reasonable. Analyze the rent prices of your competitors and do not go way above the average. In case you set up the charged monthly rent too high, the rental property may stay vacant for long periods of time.
#2 Minimize Vacancy Rates
Another sure way for increasing your rental income is reducing the vacancy rates of your rental property. You can do so by adjusting the monthly rent. Additional advice is to be actively promoting the rental property. Make use of the internet and the accessibility it offers to various real estate target groups. Create an attractive advertisement and promote it on as many places as possible.
#3 Provide More Living Space
This is a tip that can help any real estate investor in increasing the value of his/her residential real estate property significantly by spending a reasonable amount of money. Certainly, rental properties with more living space require higher monthly rent and increase the rental income of the real estate investor. You can provide more living space in your real estate investment by converting the attic and the basement into rooms. In this way you will increase the value of your rental property at a minimum cost.
#4 Add an Extra Bathroom
Similarly to providing more living space, adding an extra bathroom increases the value of your residential property. The reason behind this is the fact that real estate investments are usually evaluated not only based on their location, but also on their features. These real estate investment features consist of the number of bathrooms, the number of bedrooms, and the square ft. of the available living space. Therefore, the more features a rental property has, the higher the value of your real estate investment.
#5 Add Extras to Your Real Estate Investment Property
Adding extras to your residential property is extremely good advice when it comes to multi family homes. This is due to the fact that investing in improving one common features results in increasing the value of each housing unit in the multi family home. For instance, if you install a single common laundry unit in your multi family property, the monthly rent increases for each of the housing units that have access to it. Hence, the real estate investor receives higher multiplied rental income for a single expense.
#6 Curb Appeal
The outside aesthetics of your residential real estate property are very important. This is not only because the first impression tenants get from a rental property is extremely valuable. Additionally, people are willing to pay higher monthly rent if they live in an appealing rental property. Therefore, curb appeal can surely increase the value of your real estate investment.
#7 Rent Out on Airbnb
It is known that short-term rentals charge higher price per night and, hence, result in a higher rental income. Leasing your rental property on the Airbnb market might be a great rental strategy for your real estate investing business. Before doing so, make sure that your investment property is suitable for an Airbnb rental. Additionally, investigate your area: Is it attractive for Airbnb tenants as well as what is the demand for Airbnb rentals? Make sure you have conducted your real estate market analysis properly before renting out your real estate investment as an Airbnb rental.
Decreasing the Expenses
#1 Manage Energy Usage
Investors who manage properly the energy usage of their real estate investments reduce costs significantly. Some great tips for saving energy and thus paying less are: using LED bulbs all over your rental property; installing sensors for the heating system as well as the outside lighting; putting thermostats on the heating devices is also useful.
#2 Water Regulation
Water regulation has the same effect on expenses as the energy usage management. A real estate investor can install tamper, a device which regulates the showers’ water fall. Additionally, toilet flow calibration helps in reducing unnecessary water usage. As a real estate investor, make sure you regulate the water usage in your real estate investment in order to cut costs and increase profit.
#3 Negotiate Service Prices
It is advisable to try and negotiate prices with real estate service providers. For instance, a real estate investor can sign a contract to ensure the service provider that he/she will be hired every time the landlord need specific services. In this way the real estate investor can get some discount as a loyal customer. Even though it may not work with each and every service provider at your real estate investment, this method will potentially result is some cost reduction which is always a plus, right?
#4 Repairing on Time and Proactive Maintenance
Despite of the fact that this tip seems obvious, it is worth mentioning. A real estate investor should constantly maintain his/her investment property. In this way the real estate investor will ensure that the rental property is in its best condition all the time. Moreover, it is recommended to fix any problems at the real estate investment immediately. Repairing on time might save a great amount of money as problems which are left for later usually transform in bigger complications.
Forced appreciation is for sure challenging but extremely rewarding when done properly. If you are willing to learn more about this real estate topic as well as many other real estate investing subjects, be sure to sign up for Mashvisor.