The 2 Great Ways to Make Money with Real Estate Appreciation

We all like the idea of sitting back and making money. Wouldn’t it be nice to just let your money work for you? Real estate is a great way to do that. Just keep in mind that nothing is free. Investing comes with some risk, but the appreciation side of things is simple – it either appreciates or not. Today we will talk about 2 ways your property appreciates and 1 reason you might not like it.

What Is Appreciation?

It’s the increase in value due to the market fluctuating. If people are willing to pay more for your property than previously, it has appreciated. Congratulations.

Technically, the opposite of appreciation is depreciation. If that actually happened, it is very bad for your property and your market – think Detroit after the 2008 crash. Depreciation is more often the IRS term for decreased value of the improvements on a property. We take it as a tax benefit in real estate investing.

Way #1: Passive Appreciation

This is when you sit back and watch the property’s value increase over time. You are hoping for it to make money on its own. You hope that it will appreciate faster than inflation. Which is an important point: inflation contributes to appreciation, but they are not the same thing. Have a look at the housing prices adjusted for inflation over time (orange in the graph below). They are outpacing inflation continuously.

Source: InflationData.com

Appreciation is a nice bit of gravy on top of a great deal, but don’t ever bank on appreciation. You have no control over it. Well, except for the next way to appreciate.

Way #2:Forced Appreciation

What if you could buy a property, and force its value to increase? How could you do that? By value-adds. These are improvements to the property that encourage others to pay more for it. Buy a single family residence and put in granite counter tops. This will likely increase the value (depending on the market, of course, do your homework). Instant equity! This is what flippers do for their businesses, though you don’t have to flip to take advantage of appreciation.

This works in the multifamily residence arena as well. Though here we usually make improvements to allow us to increase the rent, which translates into value using a metric called the capitalization rate.

This is one of the best ways to make money in real estate. If you are an investor like me, you are keeping an eye to ways you can force appreciation. Other investors might not be looking for this. These are buyers of already fixed-up places, called turnkey buyers. Turnkey is not wrong, but it usually has much lower returns.

The Dirty Downside of Appreciation

The government loves appreciation, probably more than you do. It sees that as a great way to make money in the form of property tax (also income tax for rentals). If you plan to invest in real estate as a hedge for inflation, to keep your money safe for a downturn, or other risk-mitigation strategy, you probably don’t want appreciation right away. You will be looking for ways to avoid appreciation, at least on the county property valuations.

I don’t ever worry about this in my investing. The benefits far outweigh the increased taxes, and I’m willing to pay as it means I’m making more money.

Dr. Equity

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