Real Estate Appreciation | Market Appreciation vs Forced Appreciation

In Real Estate, one of the basic accounting terms is appreciation. Appreciation is an asset’s value increasing over a period of time. The opposite of appreciation is depreciation. Which is the decrease in the asset’s value over a period of time.

There are two basic types of Appreciation in Real Estate: Market Appreciation and Forced Appreciation. Market Appreciation is when the property goes up with inflation in the economy. Forced Appreciation is the property’s value going up thanks to repairs, add-ons, or changes made to the property to increase the value. (Just to name a few)

Market Appreciation

If you bought a property 100 years ago for $100,000 and did absolutely nothing to it, that property is worth substantially more today, regardless of the condition. It’s simply because of the common concept known as supply and demand.

Source: FHFA.gov

The U.S. Housing price index is a collection of public housing data that indexes all house values based on data from all 50 states. It dictates the housing economy and which way Real Estate Market Appreciation is headed. The recent major swings were the uptick after the early 2000s, the 2008 market crash, and most recently the current bear market we’re experiencing.

However, if you compare 1900-1980 and the last 40 years, you will notice there is a lot more volatility in the Real Estate Market causing much more appreciation and depreciation. Why is that? Very simple. There are a lot more players on the field. Before 1980, your everyday Joe was all right with leasing a property and working a day job. Today there are a lot more investors or entrepreneurs that are willing to get their hands dirty and buy or sell properties.

With so much volatility, this results in a robust real estate market and inflation. Prices will continue to soar at a faster rate compared to historical trends.

Forced Appreciation

Forced Appreciation, as stated earlier, is when the property’s value goes up by making renovations to the property. That’s not the only way to get forced appreciation. If you add any additional fixtures or space to the property, that’s also forced appreciation. A few other ways of forced appreciation:

  • Conversion of Property: If you take your Residential Property and convert it to Multi-Unit or Commercial Zoning. This automatically increases the value of your property.
  • Utilities: A great example is on a raw piece of land. Even land appreciates over time with market appreciation. But if you have the utility companies install the property water, sewer, gas, electricity, etc., that forces the value of the property to go up.
  • Additional Levels: If you have a single-family house and you gain approval from your county to add a second level, after adding the second level your property gains a ton of value through forced appreciation.
  • Increasing the rent: By having a higher rent, that draws more attention to other investors and claims the property to be of higher value.
  • Repairs: Of course, any repairs to damaged property results in forced appreciation.
Real Estate Appreciation | Market Appreciation vs Forced Appreciation

Conclusion

Real Estate has countless ways to make money. Appreciation is one of them, with market appreciation and forced appreciation giving you multiple avenues to see your assets gaining value over time. The other crazy part is the tax logistics behind this. How many other loopholes are there in Real Estate?

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