In the world of real estate investment, one of your best scenarios is buying a property that appreciates. If you take care to do the right research and buy in the right areas, you’ll find that your property appreciates over time.
However, not everyone is all that patient. It makes a difference for your bottom line when you invest in a property, and it immediately starts raking in more money for you. One of the best ways to do that is to help it along with a little forced appreciation.
Quite simply, forced appreciation is when the real estate investment property you’ve bought increases in value directly because of what you as the investor do to it. This has nothing to do with those uncontrollable market forces, which should help you out down the road if you’ve bought in a hot market. Instead, forced appreciation is your proactive behavior that can make the property swell with value before the projected market forces take hold.
Most real estate investors try to do what they can for forced appreciation. After all, if you can do a few little things to have a big impact on your bottom line, wouldn’t you? Of course you would! It’s the difference between a property that people want to live in and one that people will step harder on the gas pedal to speed away from.
Let’s discover more about forced appreciation and how you can benefit from it, and what to do to make it happen. Keep reading!
Forced Appreciation vs Natural or Market Appreciation
When there’s a boost in the value of the property you invested in due to the property market, that’s natural appreciation. Hopefully, you’ve chosen wisely and the demand for the properties in the area in which you’ve invested are greater than what is currently available. Other changes such as in the interest rate and inflation can also contribute to capital appreciation for the property.
You have absolutely no control over natural appreciation though you can take a rough guess as to how it might go. Still, it might be years before anything turns in your favor which is why forced appreciation can help you enjoy a larger profit. The actions you take now could change the tides for your property’s value.
When it comes to market increases, we see more of these happening more quickly along the coasts of the US. Property values in these areas rise and fall rapidly. In a place like the Midwest though, it rises and falls more gradually. That’s another reason why the location and the market within that location are crucial to your success. Choosing the right place in the right market means you have a better chance for those market increases.
You might not have any control over the market, but you can predict it by studying market cycles. Be aware though that in those rapidly changing markets, like in coastal cities, might not be best for you. There are some excellent advantages to taking your investment potential into predictable markets to get steady increases, even they are slower. You’ll be less likely to experience market downturns.
Still, wherever you choose to invest in real estate, it helps to note that you can help it along with forced appreciation. Keep reading and we’ll get right into that.
How to increase the value of a house through forced appreciation
When you’re investing in houses for your real estate opportunities, it doesn’t matter if your purchasing single-family homes, duplexes, triplexes, or fourplexes. These are usually sold based on what’s going on just across the street, also known as comps.
To put it simply, if the place across the way from your property looks clean and has curb appeal, chances are, the price you pay will be higher. The opposite is also true when it comes to comps. You can use forced appreciation here to generate a greater profit. My tips below can help you even in commercial real estate.
– Give the property a deep cleaning
Inside and out, that property you purchase needs to look clean as a whistle. Nothing will make your investment plummet more than a dirty and crowded interior. The same goes for the exterior too. In real estate, what’s inside counts but what’s outside makes that first impression.
Get rid of anything unnecessary and bulky inside and start fresh. Hire a professional cleaning crew to come out and get the walls, woodwork, and floors gleaming. This is always the first step in bringing an enticing look to commercial properties.
– Refresh the paint jobs
On older properties, nothing can give it a better facelift than fresh paint. On the inside, choose interior paints that make rooms feel lighter and brighter. Don’t go for dark, brooding colors or it will make the space feel small, tight, and like the kind of place you want to run away from. Colors choices make all the difference in creating a more open feeling.
For the exterior, this is incredibly important too. You’ll add instant appreciation on the outside of your properties when you have a professional paint job conducted. Use complementary colors that work well in the area and pay attention to trim hues for your best results.
– Replace carpets with new flooring
In commercial properties especially, hard flooring is preferred. It’s so much easier to clean. If you’re renting out to tenants, maintaining the carpets will always be difficult. You never know how people will treat those carpets. Kids and pets plus normal wear and tear can make for spills and stains that will make the property value decline again with each year.
If you can afford the expense, invest in oak or maple hardwood flooring. If not, the vinyl plank flooring looks the part without the expense. It’s great for kitchens and bathrooms. You can also choose laminate flooring, another less expensive option. All of these will last longer than carpet and are easy to refresh over time with a good buffing and professional cleaning.
– Update exteriors and landscaping
Drive through any neighborhood and you’ll be able to guess which properties list for a higher value. They’re the ones where the paint looks fresh and the landscaping is in proper order. With your new real estate investment, you’ll want to pay attention to that too.
I’ve already mentioned the importance of paint, but the exterior and landscaping are so much more than that. What you do to the outside of this property can add or even subtract thousands from the value.
Take a look around at what you see.
- Is the asphalt, driveway, or parking area looking bleak? Have it updated with a fresh coat or layer of gravel.
- Does
the lawn look sparse and patchy? Have new sod laid down.
Plant new shrubs and flowers to enhance the yard space. A landscaping crew can help with that especially on larger properties. You can also hang flower baskets and pots around the entryway to add more appeal.
– Renovate kitchens and bathrooms
Let’s say you’ve bought a duplex in a neighborhood that’s set to be the next big thing in the next 5 years. The outside looks great, but inside it’s a little dated. One of the best ways to force real estate appreciation with an immediate result is to remodel the kitchens and bathrooms.
Outdated cabinetry needs to go. It’s the biggest turnoff, as are ancient appliances. In the kitchen, a new backsplash and hood vent will change things dramatically. Go for energy-efficient appliances too. Think of the things people want in modern designs and try to incorporate them. Many people love a big kitchen that has an open appeal for families to gather and to make cooking easier with more space.
For bathrooms, you may be able to simply change out the faucet and cabinet hardware to give it a new look. If the property has one of those old yellow or pink toilets though, get rid of it. No one wants to live in a place that looks like a time capsule from yesteryear. Counters in both the kitchen and bathrooms will also give the interior a huge boost. Choose granite or quartz if possible for the best return on your investment.
– Repurpose an existing space
Take
a good look at your investment property.
Are there any odd spaces in your property that can be changed up for the
better? An unfinished basement, for example, could be retrofitted to turn into
a whole new space. Perhaps it’s a home office setup, media room, or playroom
ideal for families. It could be a laundry room or even an entirely new
apartment for separate rent.
Even closets that aren’t useful can be turned into something functional. Think of the possibilities these types of spaces can bring especially when it comes to adding more value to your property.
– Open up floor and wall layouts
When it comes to older spaces, those floorplans could do with being opened up. This makes natural light flow in and allows for better navigation. You can have almost any partitioning wall removed without damage the building’s structure. When you widen openings and create a more open space inside, it feels larger and more welcoming for anyone to comes in.
These are the types of floorplans people are choosing for new home and commercial builds and this trend is likely not to change. What with the need for accommodating those with wheelchairs as well as the need for space, people of all types feel more comfortable in interior spaces that feel open and airy.
Forced Appreciation in Commercial Multi-Family Property
So, what if you’ve invested in something larger than a fourplex? This is commercial real estate by definition. For those big apartment complexes, sky-touching high-rise condos, and smaller multi-family units, you’re looking at a commercial real estate investment.
This is important to note because doing forced appreciation for these types of properties, multi-family in particular, is a bit different. Let’s talk about the multi-family unit. This is based on the property’s NOI or net operating income. Any time you increase that NOI, you increase the value of the property.
There are two ways to do this. The first is by increasing the income for you from rents or utility bill-backs for example. The second is by reducing your operating expenses like repair or administration costs, or even utilities.
When you invest in multi-family properties that have a property management inefficiency that causes high expenses or with the potential for proven added value, you can capitalize on this to your greatest advantages. Look at properties nearby in the same sub-market in a similar class and see what interior, common, or amenity improvements have been made and try to best it.
There’s a special formula that can help you further understand the big picture here. You simply take that NOI and divide it by the cap rate, or capitalization rate. That NOI includes all the revenue that the property generated minus the operating expenses but not including debt service payments. Your cap rate is what the potential rate for the return on your investment would be if you sold it off for cash. So, generally speaking, and this will of course depend on the market at hand, for high-quality new construction properties, your cap rate will be somewhere around 3 to 5% and will keep increasing as the property quality decreases from A properties on down to those of lesser quality in the B, C, and D categories.
Basically what that means is this: if you want to increase the property value, there are two things you can do to have a positive impact. The first is to increase the NOI. The other is to decrease your expenses. Sometimes, you might be able to do both and that makes for an even more favorable NOI and can bring a significant boost to your property.
So ideally, when you’re shopping around for investment properties, in addition to thinking about the market ramifications and how they may come into play in the coming years, you should also have a savvy eye for the forced appreciation opportunities you can take to increase revenue and decrease expenses.
When it comes to commercial real estate though, there are some other tips to keep in mind for forcing appreciation and bringing you a larger return. While the property should look the part, there are differences with commercial real estate that you’ll encounter as opposed to that duplex we discussed above so keep reading!
Tips for Forced Appreciation in Commercial Real Estate Investing
As I mentioned before, there are two ways to force appreciation in commercial real estate investing. The first is to increase income and the second is to decrease expenses. Ideally, you can combine both of these methods for your best results. There are several ways to do each of these so follow below to see what you can incorporate for your best investment potential.
Increasing the Income
With the first way to force appreciation, you’re going to increase the income. This is how you make that happen.
– Raise the Monthly Rent
One of the most obvious solutions is to increase the monthly rent. You might set up a monthly rent and then forget to update your asking price relative to the market and the improvements you may have made to the property. Before you just jack up the rent though, be sure that the price you want to ask is a reasonable one. To do this, look at the competition’s rent prices and stay competitive with them. You don’t want to charge too much and have a property stay vacant. That’s even worse! Speaking of vacancies…
– Minimize Vacancy Rates
If you get too greedy with what you want to charge for rent, you run the risk of higher vacancies. When you have no one renting your spaces, you’re not making any money. That’s worse than charging too little for rent. If people aren’t renting in your property, compare your monthly rental rates to other comparable properties. If what you’re asking is too high, lower it. If it’s comparable though, you might need to actively promote the property to potential renters.
How do you do that? Simple! Use the internet to your advantage to reach the real estate target groups that would be most likely to rent on your property. You can find affordable ways to make an enticing advertisement and have it placed where potential renters would be most likely to see it.
If you’ve taken over the property and restored it, perhaps locals aren’t aware. Make sure you show the newest photography of your commercial property so people will come to see it in person. Often, when neighborhoods boost back up, potential renters don’t realize a renaissance has occurred. You’ll want to entice them over so they see it’s changed for the better.
– Provide More Living Space
Recently, there was a news story about a man who sectioned off a Manhattan apartment into tiny 4-foot-high units. This practice is illegal and disgusting, but it brings me to my next point… if you can provide more living space, people will be willing to pay for it.
An example of this is if you have a basement space that is large enough to convert into one or two rental units. Always bring in licensed and insured professionals to get things up to code and you could be drawing in more rent on that property.
You may even find that some smaller spaces aren’t worth renting out. You can renovate to split the extra space between the larger unit. This will result in being able to ask a larger monthly rent. In a prime neighborhood, it will be something people jump on when given the chance. Especially if you can do one thing more…
– Add an Extra Bathroom
There is nothing more inconvenient than having to share a bathroom with more than one other person. What new real estate investors soon learn is that location, while very important, isn’t the only factor in increasing the value of a property. It’s the features of the property. So if you have a great property that includes more than one bathroom in the rental relative to that living space, it’s going to increase the value exponentially.
So in the example above, if you renovate the entire interior space of a commercial property to have larger spaces and create it so each unit has an extra bathroom, it’s money well-spent that will generate a larger return for you.
– Add Extras to Your Real Estate Investment Property
These days, when people rent a place to live in, the amenities also go a long way to making them want to live there and rent there for a while. Remember, you don’t want vacancies in your commercial property.
So when you add extras to your residential property like a common feature everyone can use and benefit from, this is always a good idea. On the rudimentary end, providing a common laundry unit for everyone to use can boost the rent you can collect. Your renters will be happy to not have to take their laundry to a separate facility elsewhere in town.
If you have the room or ability, consider amenities that add even more perks like a fitness room, swimming pool, parks (especially with a pet-only area), and other things of this nature. People want to come home to a place that they never want to leave. That’s the idea of home, isn’t it? Your goal as a commercial real estate investor is to create these kinds of places where people want to live there and see it as a sign of prestige. This might not be possible everywhere, but look for the potential in ways to bring a better quality of life for those that rent there. It will take an initial expense on your part but will generate more revenue for you in the future.
– Curb Appeal
Do you want to generate more income? Then take that curb appeal of your residential real estate property into high consideration. The first impression that potential tenants get really counts. If the exterior looks clean and fresh and the amenities are attractive, people will want to live there and will be willing to pay a higher monthly rent.
No one ever wants to pull up to a potential place to live and see weeds, dried out and dead grass, chipped paint, junk cars, or anything like that. Make this place look the part, the kind of place where when possible renters pull up they feel like they’ve arrived.
– Rent Out on Airbnb
When you have a short-term rental like in the case of hotels, you can charge a higher price per night. This gives a higher rental income and if you can swing it in your state, using Airbnb might be a smart strategy for you. You must first make sure your state allows short-term leases and that the property is suitable for Airbnb style rentals. Additionally, your neighborhood should be appealing for these kinds of tenants. No one is going to rent it out if it’s not in a charming part of town or near attractions they’d like to see.
So these are the ways you can increase your income with your commercial real estate investment. Let’s now visit what you can do to decrease expenses.
Decreasing the Expenses
This entire section is devoted to how you can lessen the expenses your commercial real estate property will create. Keep reading to see what you can apply from here. Ideally, coupled with what I mentioned above, you should be able to make your real estate investment quite profitable.
– Manage Energy Usage
One of the best ways to decrease expenses is to manage the usage of energy on your property. This will reduce costs by a significant rate. There are so many smart ways to make your property more energy-efficient. If you’ve renovated it from the start, those energy-efficiency appliances will surely help. Making sure heating and cooling units are running optimally also helps.
A super-simple way to drastically cut costs with energy is to use LED bulbs on the entire property. Sensors for your outside lighting are more efficient too. Anything you can do to create efficiency with energy will ultimately benefit you in the long run by lowering your energy costs.
– Water Regulation
Just like energy costs, if you regulate water usage, you’ll decrease your expenses. In the showers, have a tamper installed to regulate the fall of the water. You can also have toilet flow calibrated to prevent unnecessary water waste. Regulating the water usage in your property ensures you increase your profit, plus it also helps reduce waste in the environment, something that affects all parties concerned.
– Negotiate Service Prices
This tip won’t always work, but it is always worth a try for real estate investors. You will want to see if you can get a contract with particular service providers in your area. It’s the whole you-scratch-my-back-and-I’ll-scratch-yours concept where every time you need those specific services on any of your properties, you can get some kind of loyalty discount.
It’s likely not going to work with certain utilities, but it will definitely save you some money with other things. It never hurts to inquire, so see what you can negotiate and take it from there.
– Repairing on Time and Proactive Maintenance
Think about your own home or your personal vehicle. Have you ever let a seemingly minor problem go because you just didn’t have the time to deal with it or it didn’t seem like a big deal? Let me guess what happened next… that problem, which would have been relatively cheap to fix, turned into a big, expensive problem, didn’t it?
When it comes to your real estate investment, you should always be on top of maintaining your property. A small leak can turn into a huge one that floods out a unit and causes thousands of dollars in repairs when it could have been fixed in the early stages for less than $100.
Always remember that small problems don’t go away when you ignore them. You can’t sweep them under the rug. When you do, it becomes more like an elephant under that rug. You’ve got to deal with them as they come up to prevent worse situations.
What to keep in mind when you aim to create value using forced appreciation
We’ve been through how to increase your income and decrease your expenses. But of course, not all properties are the same. You should think about the following things when you’re looking at forced appreciation.
– All Properties are Not Fixers
You might think that the only way to force appreciation is to fix up a property. But if you keep a keen eye out and have outstanding negotiation skills, you’ll be able to buy amazing properties at big discounts.
How is that possible? It’s because of the distressed debt market. There are plenty of top properties that are in immaculate condition. The only problem was that they were subjected to mortgage defaults. If you’re wise, hone your skills on buying the notes at a discount or nab the property on a short sale. If you play your cards right, you won’t have to do any fixing up at all!
– Research Leads to Making Great Deals
Research is going to be your biggest tool. If you don’t put in the work that it takes to study the market and you leave it up to guesswork, you’re going to be kicking yourself down the road. Study the market trends and calculate all your risks. Visit the properties that interest you after you’ve determined them feasible or not (I have a great trick for that here in this post). To do otherwise would be absolutely foolish.
Look around the neighborhoods too and see what potential is there. It’s one thing to hear about trends that might come into fruition but without seeing the lay of the land, you have no idea for what the future holds. Get out there and see it and investigate to make those amazing deals.
– Entrepreneurial and Enterprising Spirit
Real estate investment isn’t for you if you don’t have entrepreneurial foresight. You have to be able to imagine the future potential value any of the properties you’re considering might bring. So many people see what’s there at face value. They see a rundown building but you might see it for how it can look when it’s maintained, painted, and spruced up. You might look at the neighborhood and see how this property is going to thrive once all is said and done.
But don’t stop at that vision. Put it into writing. Make a business plan that details everything you’ll do to make this property the most amazing it has ever been. This will be your manual for making the most of your investment and to build your debt and equity funds accordingly.
This plan that you create needs to be convincing for your potential stakeholders. When you create an immaculate plan, it will be hard for people to say no. In fact, you’ll have potential partners chomping at the bit to get in with you on your property.
Ultimately, your ability to spot value in a possible deal and share that vision coupled with hard facts about income and expenses will be what seals the entire deal.
Conclusion
Not all real estate investors can afford to sit around and wait for the market to appreciate in their favor. That’s why forced appreciation is a good idea to bolster your profits faster. Upgrading the property any way you can, will always help, provided it is adding value and you can justify it with higher rents. From the outside to in, it should look like the kind of place tenants want to spend time in.
For larger commercial properties, the same is true though you can increase your income on more than just good looks. That increase can come from asking a larger monthly rent of tenants, minimizing vacancies, and adding more spaces to rent out, to name a few. Decreasing your expenses is another way to do this especially when it comes to that of energy and water expenses.
Ideally, you should be combining both of those two avenues together to generate better revenue out of your investment property. While not everything will work, quite a few of my tips above will, giving you the best possible outcome.
Real estate investment isn’t something I recommend sitting back on. You can nab some spectacular properties in prime locations if you do your research and keep your eyes peeled. Then you won’t even have to go to all the trouble to perfect it. You’ll have a property that’s ready to generate you more money from the start.
Not everyone gets that lucky though, especially on the first try. So, hone your skills for research, prepare to roll up your sleeves and get into the property to make it amazing, and look for ways to decrease your expenses. Working all these angles is going to give you the best results.
When in absolute doubt, look at a property and ask yourself, “Would I live here?” and if that’s not a resounding ‘yes’, then think about what it would take to make this property welcoming to tenants. Then bring that plan to fruition. It’s all in those little details!
