Understanding Real Estate Appreciation

And The Role It Plays In The Rate Of Return On Investment Real Estate

Real estate appreciation is one of four potential ways to earn a return on a real estate investment. The other being, loan amortization, cash flow, and tax benefits of depreciation.

Appreciation can be defined as an increase in the value of a property due to changes in market conditions or other causes.

Some of the market conditions that could cause appreciation in real estate include things like:

  • Inflation
  • Increased demand for real estate in general in your area
  • Increased demand for rental units in your area (if you own an apartment complex)
  • Decrease in the cost of money, ie. interest rates
  • etc.

Exactly how and why these market conditions would cause real estate appreciation would be a fairly lengthy and academic discussion. One that would likely involve me dusting off my old economics text books from my undergraduate years. Believe me, I don't think either of us wants that. Suffice to say that understanding why property values increase due to market conditions and predicting when those market conditions will occur are two completely different animals. Nobody can predict whether the value of a particular piece of real estate will rise or fall due to market conditions, let alone predict what the future appreciation rates will be.

Controlling the "other causes" that make up the final part of the above definition is another story. Understanding what those "other causes" are and how you can use them to increase the value of your investment property is crucial to earning extraordinary rates of returns. In fact, in many cases I have experienced rates of return on my investment properties that are well above 100% on an annualized basis.

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