In What Cases Do Real Estate Properties Appreciate in Value?
What makes a property appreciate in value? When investing in property, be it land or real estate, value is one of the most important considerations – especially if you plan on holding onto the asset for the long-term.
What Causes Properties to Appreciate in Value?
How can you determine whether a property will gain value over time? Knowing what to look for and what circumstances can lead to better value and will help you find the ideal property for your investment goals. That knowledge will also help you stay away from potentially dangerous investments that lead to nowhere.
1. Location, Location, Location
It’s the biggest cliché on the planet, but it’s true: location, location, location is the most important thing when buying property. And location will largely determine whether the property will appreciate in value, remain stagnant or lose value over time.
If you get lucky enough (or are savvy enough) to purchase property in an up-and-coming area that’s on the cusp of explosive growth, the value of the property will skyrocket in a relatively short amount of time.
Most properties will appreciate in value over time, although some will gain at a slower rate than others. Rarely will you find properties that actually depreciate in value. Properties in places like Detroit, Michigan, a city that deteriorated over time, likely lost an incredible amount of value if they were purchased before the city’s decline (although the market is showing some signs of recovering). These circumstances are rare exceptions – not the norm.
Yet still, it’s important not to underestimate the importance of location. Look for areas that are experiencing growth, and you’ll watch your property’s value appreciate rather quickly.
2. The “Fixer-Upper”
If the location doesn’t boost the property’s value, upgrading the home will. This rule really only applies to properties with a structure on it, although it is possible to “upgrade” vacant land by making improvements to boost its value. But the effect is amplified when applied to a home or other structure.
Flipping – buying a home on the cheap, fixing it up and selling it for a higher price (sometimes substantially higher) – has made a lot of investors rich. And making improvements on an existing home is one of the simplest ways to boost the property’s value.
Of course, there are other factors at play here, too. You can’t just buy any house, fix it up and expect a major appreciation in value. You need to pick the right house at the right price and in the right location.
And when we talk about upgrading a property, that includes the exterior of the home. Curb appeal can add as much as 10% to the property’s value.
3. When Land Is in High Growth Areas
Land almost always increases in value simply because it’s a finite resource. But vacant property can greatly appreciate in value if it’s located in a high-growth area.
As the population continues to grow, land availability becomes scarce. Demand is obviously higher for housing in these areas, so land becomes increasingly valuable, particularly to developers.
The same demand and supply law can also be applied to real estate. Right now, we’re seeing markets with limited inventories, and home prices are starting to rise again in many areas.
When the supply is limited in one particular area, it drives up the value of nearby properties.
4. Interest Rates and the Economy
Other factors also influence the value of properties and how much they appreciate (or don’t appreciate) in value.
Higher interest rates tend to have a negative impact on home prices because buyers can afford much less when rates are high. Lower rates often lead to an increase in property values because more buyers can make their money stretch further.
The state of the economy will also play a role in how much a property appreciates. Think back to the financial crisis of 2008. Many people lost their jobs and were no longer able to afford their home payments. The housing market tumbled, and home prices plummeted.
Now that the economy is picking back up, property values are once again appreciating.
Infrastructure may be the last thing on your mind when you’re looking at properties, but it can have a great effect on property values. Changes to the social and physical infrastructure surrounding the property can greatly increase the value of living there, which naturally boosts its value.
Developments like new shopping malls, workspaces, schools and hospitals all contribute to the appreciation of property values.
Changes to nearby properties may also contribute to higher home prices. The development of housing units or upgrades to other properties on the same street can help boost the value of properties in the surrounding area.
6. A Room with a View
Properties with unspoiled views will naturally have a higher value than those that do not. And their value will also most always continue to appreciate over time.
A property’s view isn’t something you can necessarily change, but it’s something to consider when looking for new property to buy.
7. Market Booms
Properties appreciate in value when the housing market is booming. But that growth may not extend on indefinitely. Eventually, the market hits its peak, the bubble bursts, and prices plummet again.
This is exactly what we saw during the financial crisis. Housing prices were at their peak in 2006, and by 2009, had plunged sharply lower. The housing bubble expanded until it burst, and many homeowners were left with underwater mortgages.
Under normal circumstances, most properties will appreciate in value over time simply because of inflation and the law of supply and demand. But other factors, like the ones listed above, can drive value higher at a much quicker pace. Location is the key important driver of value, but upgrading a property can also help appreciate its value in a short period of time. Things like housing market booms, properties with views and interest rates also affect property values, but not as dramatically as others.
Whether you’re buying property as an investment or to live in, it’s important to consider these factors and how they may impact the value of the property.
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