Welcome to ProspHer Collective with Ali and Amanda. Thank you for joining us today. Appreciation is one of the four wealth generators we learned about this vlog, and we’re going to dive deeper into it because it’s crucial for real estate investors. Understanding appreciation is essential for managing investments properly. To be successful in real estate, you need appreciation.
https://www.youtube.com/watch?v=cEOMgHby5dU
Defining Appreciation
Appreciation, for our purposes, is the increase in value over time. Think of the stock market: you invest money, and it fluctuates up and down. Ideally, when you want or need to withdraw, your investment has increased in it’s value. In other words, it has appreciated. Real estate is similar. We buy property and hope or work towards increasing its appreciation, so when we sell or pass it on, its value has increased and we make a profit.
Without appreciation, you’re losing money. If you buy a property and sell it five years later without appreciation, you’ve lost money due to closing costs, marketing costs, and inflation. In our current high-inflation period, without your property increasing in value, you’ve lost money, and selling at a loss becomes likely.
2 Types of Appreciation: Market Appreciation & Forced Appreciation
There are two types of appreciation: market appreciation and forced appreciation, which is our favorite. We implement forced appreciation daily in our property management company. Let’s give a couple of examples.
Increase Your NOI with Forced Appreciation
Let’s say you buy a 10-unit residential multi-family property, and two of the units rent for $1,000 a month while the other eight rent for $800 a month. This is our favorite situation because it’s proven that you can raise rent to $1,000 a month. Forced appreciation would involve buying the property and raising everyone’s rent to $1,000 a month. By increasing eight units by $200 each, you’ve increased your net operating income (NOI) by $1,600 a month. Annually, that’s $19,200. To see its impact on property value, divide the increase in NOI by your market cap rate, typically 7%. This results in an increased value of $274,000 in one year.
2 Other Methods of Forced Appreciation to Increase Your Property’s Value
Another example is adding a washer and dryer hookup to the unit, which typically increases rent by $50-$100 per month.
Billing back utilities to tenants, called ratio utility billing system (RUBS), is another method. For instance, with an 8-plex that isn’t individually metered, the owner usually absorbs the cost. Using RUBS based on occupancy, tenants pay their fair share of the water bill. If the monthly water bill is $400, tenants now pay this, resulting in a $4,800 annual gain. Dividing by the 7% cap rate, the property’s value increases by approximately $70,000. This easy gain takes minimal time monthly, but significantly boosts your property’s value.
Forced appreciation allows us to control outcomes and property value, independent of market cycles. Market cycles are unpredictable, as seen with COVID-19 and its impact on property values and cap rates.
To recap, we discussed appreciation, a value gain over time, averaging a 3% annual increase. Without appreciation, you’re losing money. There are two types: market appreciation and forced appreciation. We also touched on cap rates, market cycles, and property values. For more on these topics, check out our other vlogs
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