Things to Know About Real Estate Appreciation

Things to Know About Real Estate Appreciation

One of the greatest debates in real estate investing has always been whether you should invest for cash flow or for appreciation. Which investment model is better for you depends mostly on your reasons to invest in real estate and for how long you plan to keep your property. If you are in real estate investmemt for some extra income and you don’t plan to keep your property for more than 10-15 years, then you should focus on the cash flow. If, on the other hand, you are in real estate with the goal of selling your property in the long run after the price has risen significantly, then you must concentrate on real estate appreciation.

There are many factors which determine real estate appreciation, some of which are more obvious, while others are rather obscure.

1. Land

If you are looking for an investment property and to a lesser extent if you are looking to buy a home, don’t allow yourself to overstress the appearance and the structure of the property. Of course, the actual physical property is important especially if you plan to live there yourself in the long term, but regardless of how beautiful your property is, the physical structure will lose its worth over time. In addition, maintaining the property will require more and more capital investments over time to keep it running. Thus, you must focus on the land. Land does not decrease in value as it ages; on the contrary, it is what drives real estate appreciation. As the population is constantly increasing, more people are looking for homes, more and more properties are getting built, land becomes more and more expensive. So, if you have the option of buying a larger and nicer house on a smaller piece of land or a smaller and less luxurious building on a larger piece of land for the same amount of money, go for the latter. This will bring you more real estate appreciation in the long run.

2. Location

The second factor determining real estate appreciation is closely related to land. Once again, the actual physical structure is only of secondary importance. Real estate property value at any point is a function of supply and demand, while the appearance, the functionality, and the maintenance of the physical structure have a lesser impact. Location is the key! Location refers to many aspects – the state, the city, the neighborhood, the exact place within the neighborhood. Locations within markets with higher population growths, better economies, more developed infrastructures are in higher demand and are also more likely to provoke real estate appreciation in the future.

3. Future Development Plans

The currently existing infrastructure will significantly impact the market value of your real estate property at the moment. In addition, though, you should also study the governmental and commercial plans for the further development of the area in the future. If you buy a decent house in a not very lively suburb which is scheduled to undergo major infrastructural and commercial developments (connection with the city, schools, hospitals, banks, restaurants, etc.) in the next 5-10 years, you are guaranteed to benefit from massive real estate appreciation.

4. The Physical Structure

Although we kept repeating that the structure and functionality of the building are not the number one factor in real estate appreciation, they still do matter.

5. The Economy

While you can control the physical structure and the location of your real estate property, there are other determinants of real estate appreciation that are well beyond your control. One of them is the economy – the local economy, the national economy, and the global economy. As we mentioned above, locations within more vibrant local economies will appreciate more over time. Moreover, if the economy is doing well and people are employed, the demand for housing will increase, which means that prices of both land and properties will go up. 

6. Interest Rates and Lending Guidelines

Another important factor which will influence not only your property’s real estate appreciation but the whole housing market is the interest rate and the related lending guidelines for mortgage. If the interest rate is up, people will be less able to afford mortgages - even where applicable - for their homes. Loosening guidelines, on the other hand, will make it easier for more people to afford buying a home using mortgage.

Finally, there are many other factors which influence the real estate market and could lead to real estate appreciation. These include demographics (how fast the population is growing), the availability of building materials, to list a few.