One of the biggest reasons we absolutely love Multifamily Real Estate is because we can Force Appreciation. Don’t get me wrong – I love Natural Appreciation too. I don’t discriminate. Either appreciation is a beautiful thing, but being able to foresee and control an outcome is an amazing benefit of apartment investing.
So, what is appreciation? Appreciation is the increase in value of an asset over time. It can happen naturally or it can be forced. Natural appreciation, or market appreciation, happens the market is trending upward – in a seller’s market where demand outpaces supply, and there is little change in inflation and interest rates.
Think about our local market in the Dallas-Fort Worth metroplex. Both rental and property values have skyrocketed in the last 5 years. There is good reason for this – the DFW market has amazing job growth, population growth, education and workforce, diversity, infrastructure, friendly business climate – all on top of being a great place to live. It’s no wonder DFW has experienced the growth it has. That is natural appreciation. If you purchased real estate here in the last 5 years, you look like a very smart person right now.
Well, what if that Natural Appreciation slows down? Or what if you own real estate in a secondary or tertiary market? We buy real estate in emerging markets too, not as sexy as Dallas. The beautiful part of owning rental property is the fact that you can control the properties’ success through methods such as forced appreciation.
The value of an investment property is based on the income that property is producing. In a nutshell, if you can increase the income the property is producing, you can increase its value. This is where forced appreciation comes into play. You can force appreciation in many ways, the most common being increasing rents and decreasing expenses – both will increase the property’s net operation income (NOI). Every $1 increase to the NOI can add roughly $8-$10 to your property’s value. These little increases add up pretty quickly!
We know that through prudent underwriting, market knowledge and experience, and improved management, we can identify the most attractive and secure investments available today.
Sean C. Na