The In’s and Out’s of Real Estate Appreciation
Thinking of becoming a real estate investor? The first priority to starting your real investment journey is to have a keen understanding of real estate appreciation. Time is one of the most important factors in finding real estate. Markets tend to fluctuate, locations increase and decrease in value with the change in demographics, increase in competition, and other factors, so paying close attention to the development around your potential investment will help you create an accurate valuation.
What does real estate appreciation mean?
Real estate appreciation is understood as to how the value of an investment property increases over time. There are two types of real estate appreciation ideologies. One is the standard form of appreciation as defined above the other is called forced real estate appreciation which means the property value increases once repairs and renovations are added to the property. This is typically done by a property owner by adding specific amenities to the property like a washer/dryer, updated kitchen appliances, and any other cost altering additions. Those costs are then factored into the selling or rental price.
Things to know
Fair Market Value- the price of a rental property that an investment property will sell in the current real estate market.
Market Value- Price listed on the property, this can be higher or lower than the fair market value.
Appraisal Value- An individual's or property appraiser's own value of the investment. This can be done by a professional or be the opinion of the owner. This will require due diligence to help you during the negotiations.
How do you calculate real estate appreciation?
You can make an accurate calculation of the value of your property. by dividing future growth potential by the annual rate and number of years on the mortgage.
The formula would look like this for example:
- Future Growth = (1+Annual Rate) ^ Years
- Future Value = (Future Growth) x Current Fair Market value
These calculations are simply an estimate but it will allow you to see the potential in an investment. This provides you with heavy ammunition when pursuing investors for your property. Make sure to focus on properties that present a positive cash flow. There are three main valuation methods used to calculate the value of a property.
Sales Comparison Approach - Means to compare your potential investment to similar properties in the area and who serve a similar demographic.
Cost Approach - This concept focuses on the investor deciding to not invest or buy a property that could cost more to duplicate. If you can’t afford to recreate the property to your liking the value may be higher than your budget. You must remember real estate investment is business and should make sense financially to everyone involved.
Income Capitalization Approach - This approach focuses on a property's income. This method estimates the annual growth income of your property.
Appreciation can help encourage investors to provide the money you need to purchase a property. A proper valuation helps to alleviate skepticism in the investing process. Your investors will want to know you are educated on the property and how it will be used to bring a return on investment. Pay close attention to the numbers.
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