Several investors are familiar with the phrase “appreciation”. However, not many investors know that forced appreciation is a possibility in real estate. By the phrase “forced appreciation”, we mean investor-induced appreciation. In simple terms, this refers to an appreciation caused by the investor/real estate owner.
Real estate is a field with numerous opportunities. It allows you to diversify your portfolio and earn funds via multiple streams. However, it also demands that you constantly learn about the real estate industry.
If you are starting, it might be essential to research the profitability of real estate in Nigeria. Our guide, "How Profitable is Real Estate in Nigeria?" will be helpful as you conduct your research. Better still, you could check the Types of Real Estate and All You Need to Know about Them.
What is Property Appreciation?
Real estate appreciation is the gradual increase in the value of a property with time. This can happen in either of two ways. Your property appreciation can happen via natural/market appreciation or forced appreciation. In this segment, we will ]discuss the two types of appreciation in detail.
1. Natural or Market Appreciation
Natural appreciation occurs when changes in the real estate market result in increased value of your real estate properties. One of the changes could be increased demand for real estate properties in an area.
Land is a fixed asset; it neither increases nor decreases. When there is a surge in demand for investment properties in the area, it leads to a spike in price. doesn't stop within a short time frame. Rather, the property continually appreciates and ends up favouring patient investors.
Another factor that could influence market appreciation is the location of your property. If your property is strategically located close to social amenities and major city areas, your property will experience market appreciation at some point.
For example, if a new airport is opening in the area where your property is cited, there will be an increase in demand. Business owners will desire to construct their companies and businesses in that area. Schools will naturally spring up and several people will want to make that area their residential apartment. In turn, this will lead to increased demand and consequently, market appreciation.
It is essential to note that real estate investors cannot influence/induce natural appreciation. However, they can make their property appreciate via forced appreciation.
2. Forced Appreciation
Forced appreciation is a type of appreciation which increases a property’s value because of actions by an investor. By implication, forced appreciation is not induced by market appreciation. Rather, it is caused by proactive actions taken by the real estate investor.
Forced appreciation helps you increase your earning potential from a property regardless of market conditions. It also helps you drive growth and make your property stand out in the area it is located.
Ways to Leverage Forced Appreciation
1. Property Rehab
Property rehab is a way of improving a property such that its value becomes higher than the improvement costs. This could involve remodeling, renovations and refurbishing of a property such that it becomes attractive to potential buyers and tenants.
For example, a newly renovated apartment will have a bright ambience and look more attractive than older-looking apartments in the area. As a result, more tenants and buyers will be interested in having the apartment for their residential or commercial purposes. This will in turn enable the property owner to increase the price above the general market value with an assurance of getting a tenant/buyer.
2. Maintain the Property Meticulously
Regularly carry out preventive and corrective maintenance measures on your apartment. This will prevent costly repairs and ensure that the property is always in shape. One of the structures you could implement is regular inspection of the property.
When you inspect the property regularly, you will spot faults earlier and you will be able to fix them early. Failure to fix little damage in time could increase the magnitude of the damage and cause you to spend more. In worse scenarios, it could even lead to the total collapse of the entire property.
3. Increase the Living Space
Increasing the living space of a property is an incredible way to leverage forced appreciation. It involves the conversion of unused portion portions of the property into a usable apartment. It could be as simple as reducing the garage space and carving out a mini-room or store.
Increasing the living space of your property could also include converting single rooms to self-contained apartments. Due to the love of privacy by several people, you can be sure the demand for your property will increase after increasing the living space.
However, before increasing the living space of a property, you need to estimate and work with a budget. Additionally, analyze the interest you would make after such improvements so you don't run at a loss.
4. Improve the First Impressions of Your Property
Little tweaks to the appearance of your property could go a long way in increasing the value of the property. You want to ensure that the property makes a statement on everyone who walks in through the door. Sometimes, it doesn’t cost so much to upgrade your property to a statement-making apartment.
Sometimes, the difference could be a fresh coat of paint or the introduction of interlocking to the floor. At other times, it could even be as simple as adding security lights to the fence walls. Overall, your goal is to ensure that your property stands out and catches the attention of guests.
5. Increase the Rent Strategically
While it's important for you to make the rent price as reasonable as possible, you can increase the rent at intervals. One of your cues could be development in the surroundings and happenings around you. For example, if your property is located around a school area, an increment in the residential fees on the campus could be your cue. Simply bump up the price a little in a way that there would be no way to resist the offer.
Before increasing your rent, it is important to research competitor prices. This will guide your increment and help you keep the price within a reasonable amount.
6. Minimize Vacancy Rates
Minimized vacancy rates coupled with a constant advertisement of the property is a great way to force appreciation. The advertisement force will put the property in the face of many people. Thus, creating a pool of several people who desire the property to constantly request for it. Coupling this with a minimized vacancy rate gives you the liberty to spike the price a bit.
Advantages of Forced Appreciation
Forced appreciation has numerous benefits for you as a real estate investor. In this segment, we will be showing you the advantages of forced appreciation.
1. Risk Mitigation
Forced appreciation sometimes involves property maintenance and outlook improvement. This helps you spot weaknesses in a property. It also enables you to site potential risks so that they can be addressed before they become bigger issues. As a result, it sets you ahead and makes you take corrective measures that will elongate the lifespan of your property.
2. Increased Return on Investment
Strategically improving your property increases the visual appeal, demand for your property and earning value of the property. This would enable you to increase the property rent and ultimately, your cash flow from the property.
3. Quick Value Spike
Natural appreciation often requires you to wait for years and sometimes decades before it happens. On the other hand, forced appreciation is a quick way to increase your property value. Once the improvements are well-executed, you will notice an increase in value within a short time.
4. Gives You Control Over Value Enhancement
Forced appreciation enables you to have a say over the increment in value of your property. Rather than rely on a market appreciation, you can increase your property's earning potential yourself. Additionally, you can strategically increase the value constantly as you desire. Hence, it won't be a one-off property appreciation; this allows you to make your calculations and project appropriately.
5. It Attracts Quality Tenants
The outlook of your property influences the quality of tenants you attract. Well-groomed properties with beautiful ambience tend to attract tenants who are willing to pay premium fees. This will lead to lower turnover rates and reduced vacancy periods. Hence, giving you a stable source of income.
Conclusion
With little adjustment and actions, you can increase the value of your property as a real estate investor. In this blog, we examined the types of appreciation. We also talked about the advantages of forced appreciation and how to leverage forced appreciation as a real estate investor.
At Land Republic, we desire to see you excel as a real estate investor. We have several resources you can apply in your real estate investment journey. If you ever need to make enquiries or acquire real estate properties, contact us via +2348122222283 and support@landrepublic.co.
