Real Estate Appreciation

Appreciation is the increase in value of a property over time. Factors that influence the rate at which real estate appreciates include inflation, capital improvements, supply, and demand.

Real estate investors look for many factors that will cause real estate to appreciate in value before they purchase properties. When weighing the benefits of purchasing a home, many people choose to buy in order to increase their net worth via appreciation.

Property values appreciate in value over time due to inflation. Inflation is caused by an increase in the amount of money in circulation. The value of money declines when the supply of money increases and the end result is increased retail prices. The cost of the land, construction materials, labor costs, building permits and fees, etc. go up over time making it more costly to replace an existing property. These factors alone do not guarantee that an income property will increase in value. Factors such as poor upkeep, the general decline of an area, economic obsolescence, reduced demand, increased crime levels, etc., can cause properties to decline in value even when replacement costs are increasing. In summary, personal residences and income property usually appreciate in value over time due to inflation because the cost to replace them has increased.

You can increase the value of real estate by making cost-effective improvements. Improvements such as siding, a new roof, a new addition, new carpeting, landscaping, paint, can increase the value of both personal residences and income property. Some improvements, dollar for dollar, will result in a greater increase in value than others.

Supply and demand can cause the value of real estate to go up or down. Oversupply can cause real estate values to fall and undersupply can cause prices to appreciate. The demand for real estate is affected by the availability of jobs, the level of interest rates, availability of land, proximity to shopping, schools, parks, churches, etc., infrastructure improvements, population changes, desirability of an area, crime levels, property tax rates, zoning changes, etc.

The general level and the direction of interest rates can greatly affect the demand for real estate. As mortgage rates increase, the demand for real estate decreases and vise versa.

The proximity to recreation such as golf courses, cultural facilities, parks, universities and colleges can result in a higher rate of appreciation. Low property taxes can also increase demand for real estate.

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Determine the Real Estate Financial Statistics for a Property

Before you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services

If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.

You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet

The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.

We hope you become a more successful real estate investor by using this site! membership | services