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We always hear everyone talking about the appreciation they are receiving on their home and how it pays off in the long run. I figured I’d write a quick blog to briefly explain what appreciation is and how it works. To start, you have two types of appreciation, natural and forced. Both result in the value of your property increasing but they are for different reasons.
Natural Appreciation
This refers to the value of your real estate due to the changes in the market. You have no control over this increase or decrease as it is natural market effects based on the amount of supply and demand in the market. Interest rates and inflation do have an impact on this as they are driving factors for the supply and demand in the market. Your property can be positively effected in a booming market. However your property value can be impacted in the other direction as markets slow down. This is determined on the comparable properties that are selling. A comparable property is a property that located nears yours and has the same features (square footage, # of bedrooms, # of bathrooms, etc.). If you’re ever wanting to know what the value of your real estate, this is the first thing professionals will review and analyze.
Historically overtime real estate has always increased in natural appreciation. I know we all hear our grandparents say I bought my home in 1970 for $60,000 and now it is worth $600,000 today. Who knows maybe 50 years from now a property worth $600,000 will be worth $3,000,000.
Forced Appreciation
This refers to the value of your real estate due to the actions made by the owner. This area you do have control over the value of your real estate. Forced appreciation often times occurs when you’re purchasing a property in need of many updates and repairs, many know the industry as “flipping”. Investors often times will purchase a property significantly below market value. Then remodel the home increasing its value to the standard of the market value. Market value is the value given based on the comparable properties. Forced appreciation can occur from remodeling your kitchen, bathrooms, putting an addition on your home, and any large project that has significant value. Forced appreciation is referred to as “sweat equity” for home owners.
