What Factors Influence Real Estate Appreciation?

Dated: July 16 2020

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Real estate appreciation is one of the key ROIs in real estate investments. That said, how much a real estate property appreciates over time is dependent on a couple of factors. Some of these we know, others not known. Read on to learn about the factors that influence real estate appreciation.

1. Land

Is your priority an investment property that is not necessarily a home or for personal use? If yes, you should not prioritize the structural composition or the appearance on your list of preferences. This is because the physical features of the property are the biggest sources of depreciation over time. Even the most attractive houses lose their physical value over time. Plus, the IRS considers depreciation when estimating the tax values of a property. Against this background, it will be smarter to prioritize land over the aesthetic or structural appeal of a property. Rather than lose value, lands are one of the biggest drivers of real estate appreciation. The increasing population means the demand for homes will increase. Investors will look for vacant lands to build these homes, thus increasing the demand for land. Therefore, buying a less colorful and smaller property on a larger piece of land is a better investment move than going for a colorful and bigger property on a small piece of land. The former is more likely to appreciate considerably over time.

2. Location

Location and land work the same way when it comes to real estate appreciation. Hence, the value of a property concerning location will mostly depend on market forces, i.e., the demand and supply. Although factors like physical structure and functionality remain applicable, they are mostly secondary. So, if you have to estimate a property value using the location or the physical appeal, the former is always the better option. Location is crucial when buying a real estate property. The state, city, neighborhood, and the precise area a property is situated in a neighborhood all count significantly when it comes to appreciation. The best locations are those with thriving economies, higher population growths, and modern infrastructures. A real estate property that ticks all these boxes will most likely appreciate considerably over time.

3. Development Plans

As mentioned earlier, the level of infrastructure of a real estate property may influence the market value. However, the impact is not long-term or futuristic. This is why you should also check if there are plans by the government to develop the area. Owning a good property in a relatively underdeveloped area is not always a bad investment choice. It is a good choice if there are plans to build infrastructures and develop the area commercially, over the coming years. Although you may have to wait for between five to ten years for these plans to materialize, the massive real estate appreciation that comes with it is always worth the wait.

4. The Physical Structure

You may also consider the physical structure of a property as a determinant factor in real estate appreciation. However, it is not as impactful as the three other factors listed above. That said, a smaller, less appealing property will most likely appreciate considerably over time. Again, the land is the driving force here. For instance, let us assume that you are trying to choose between Property A and Property B as your next investment property. Both properties are sitting on different lands of the same size, but the size of Property A is 2x that of Property B. This automatically means Property A is more expensive than Property B. After a few years, the two properties will appreciate but in different ways. While the lands will record the same level of appreciation, the property on the lands will not. Property A may appreciate by 10%, and Property B by 20%. From these results, it is clear that the smaller and cheaper house will appreciate more and give you a higher ROI.

5. The Economy

The fascinating thing about the economy as a determinant in real estate appreciation is that it is not in your control. Unlike the location and physical structure that you can make decisions on, the local, national, and global economy are well beyond your reach. Hence, it is better to go for a property in a city with a thriving economy. Such properties tend to appreciate significantly more than those in struggling economies. For instance, a thriving economy translates to an increasing employment rate and an increase in housing demand. There is also a corresponding rise in prices of land and properties. So, it is advisable and safer to buy properties in large economies, hoping that the global economy will not adversely affect the national or local economy.

6. Interest Rates and Lending Rules.

The last determining factor on our list is the interest rates and the associated lending guidelines. These are important because they affect both the real estate appreciation of a property and the entire housing market. This is how it works: an increase in interest rate will make it difficult for people to get loans. Therefore, there will be a general decrease in the prices of real estate. Conversely, a reduction in interest rate will translate to an increase in real estate prices, because more people can afford loans to buy homes. In the same vein, if unfavorable lending guidelines are introduced, more potential buyers end up disqualified. The ultimate result is a decrease in price due to a drop in demand. Favorable and loose guidelines, on the other hand, makes more people eligible to buy a home. Therefore, prices go up as a result of an increase in demand.

Finally, factoring in these factors (in the order they are listed above) when estimating the potential property's appreciation will inch you closer to accuracy. That way, you can avoid making the wrong investment decisions. Good luck!

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