Natural Appreciation Vs. Forced Appreciation

Natural Appreciation Vs. Forced Appreciation

Ever wonder about Natural Appreciation Vs. Forced Appreciation? Appreciation is beautiful thing, and one of the best ways to increase your property value as a real estate investor. What is appreciation? Appreciation is the increase in value of an asset (your property) over time. It can happen naturally or it can be forced. Natural appreciation, or market appreciation, occurs when the demand for rental properties outweighs the supply available, or because of changes in inflation and interest rates. Think of the Burlington market. You hear people saying all the time, "The rental rates and listing prices are outrageous!" and they are right. This is because everybody wants to live in Burlington, and apartments get snatched up extremely quickly. So obviously there is a large demand for Burlington apartments, but there is also a low supply. Basically you, the real estate investor, have no control over the impact market appreciation has on your property. If a major employer in the area decides to pack up shop and move to another state, taking a couple hundred jobs with it, you can bet that the market will experience depreciation (decrease in value) rather than appreciation (increase in value). Again, an event like that is out of your control. However, the beautiful part of owning rental property is the fact that you can control the properties' success through methods such as forced appreciation.

As I have stated in past blog posts, 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!

A good property manager will be able to do an analysis of your property's current performance, compare it to the current market, and then develop a management plan to really make the property produce. This analysis will have 4-5 main components, with the most common being:

  • Property Analysis
  • Market analysis
  • Neighborhood analysis
  • Analysis of alternatives

The property analysis is used to gather data on current performance. Rents are determined, expense info is gathered, vacancy rates are calculated, along with the property's net operating income and break-even ratios. All this info is used to compare your property to other properties and develop a course of action once the market and neighborhood analysis is complete.

A market analysis is, for example, an overview of the entire Burlington area. In this portion of the management plan the property manager compares your property to the entire market while focusing on rental rates, amenities, relation to major grocery stores and attractions, etc.

Next is a neighborhood analysis. Within the Burlington market there are many sub-markets, such as The Old North End, Downtown, areas around the universities, etc. The property manager conducts an analysis of your property and compares it to properties in close proximity to yours - again focusing on rental rates, amenities, relation to major store and attractions, etc., within the neighborhood.

After the property, market, and neighborhood analyses are done, the property manager can create a plan of action. This plan is called an analysis of the alternatives. Here the property manager presents their findings explaining how your property compares to the rest of the market and then presents how they plan to improve the property's performance. Basically it's a statement of "here is what your property is doing now, here is where we think it can go based on our findings." You can bet that part of this plan is to increase rents over a certain period of time, while you re-evaluate expenses and doing everything possible to increase net operating income and force appreciation.