October 22, 2020

The Power of Forced Appreciation

For my ally is the Force, and a powerful ally it is.

Yoda (Star Wars: The Empire Strikes Back)

In Star Wars: The Empire Strikes Back, Luke Skywalker is faced with problems while he was under Yoda’s training, as he didn’t put his full faith in the Force and only saw limitations. Ironically, this could also be seen in the real estate industry in some way.

The Prelude: What is appreciation?

Appreciation in real estate refers to the increase in value of the investment over time. There are two methods where appreciation can happen: through natural and forced appreciation. It is important to take this into consideration as it dictates how much the return of your investment on an annual basis would be. If you’re starting into the real estate business, you might be wondering if there are key factors that influence appreciation.

By general context, natural appreciation (also known as market appreciation) is when a property or investment increases in value due to uncontrollable factors. The increase can be attributed to changes in the real estate market, inflation rates, or due to an increase in the demand for the properties. Let’s say that there is a new school or university that is built on your location, so there would be a rise in demand for the nearby properties, and they get much more desirable.

Now you may be wondering, how does forced appreciation work then? Is it something that you actually “force” in the real estate market? Do you actually change something on the uncontrollable factors involved with natural appreciation? Let’s find out!

Forced Appreciation Awakens

Forced appreciation is when a property or investment increases in value due to the investor’s actions. It means that the appreciation is not influenced by the uncontrollable factors that natural appreciation depends on. The increase can be attributed to different proactive engagements of the investor in order to increase the properties value, which enables the investor to have direct control how they could expedite the process of appreciation of a property.

In order for the forced appreciation to take effect, you should focus on making the investment property to have a higher value than it used to be. The formula for computing the property value is as follows:

The NOI covers the total income generated from the property, subtracted by the operation costs (which does not include the debt service payments if you have any). Meanwhile, cap rate is the potential rate of return for the investment if it’s sold for cash. This means that, when the value of a property increases, then its NOI increases as well. In that case, we are given two possible ways of implying forced appreciation, by increasing revenue and decreasing expenses. Let’s go over those two ways onto our next points.

Unlimited Power!: Increase the income

Increasing the income that you get from your investment property sure is a great power to grasp with, but how do you do it?

If you have properties that are rented, the most obvious way of doing so is by raising the monthly rent. However, this method would only be applicable if the units on your current property are below market value, meaning the rent prices aren’t updated yet. This opens up as an opportunity for you, as the investor, to capitalize and push up the income that your property has to offer even more. But be careful on updating the rent price and make sure that the updated rent price is reasonable enough for tenants to pay, yet enough for you to get better profits. With that being said, it is good that you analyze the rent prices of your competitors and make sure you don’t go overboard. After all, we don’t want to have units that are vacant for long periods of time because of that.

Another thing that you could do is to provide extra spaces within your properties. You can start by having additional bathrooms, converting attic spaces and basements into rooms. This would enable you to get more tenants as much as possible. Other methods for increasing the income would be adding other fees for your tenants such as parking fees or pet fees. You may also want to make sure that your property is well marketed to avoid vacancies at long periods of time. You can join our REIQ Community as we have a lot of investors and potential tenants or buyers who may take interest in your property.

Reducing it down: Decreasing the expenses

One other way of making sure that you have better profits on your property investment is to reduce the expenses. This involves cutting or saving up for maintenance costs and making sure that the property is efficiently maintained.

You can start with managing the energy usage on your properties by using LED bulbs for lights, adding sensors for the lighting outside, having the heating and cooling units run optimally, or just anything that would create efficiencies with energy. These will significantly cut costs on how much you’re supposed to spend, which then enables you to get more profit since you spend less.

You can also consider regulating the water usage, since water is one of the most neglected resources at home, next to energy or electricity. You can do so by applying a tamper on the water systems so that the flow of water would be regulated. You can also have your toilet flow calibrated to reduce unnecessary water waste, which then not only helps the environment, but also helps you to get better profits. 

Although it may seem obvious, it is worth noting that you also need to have proactive maintenance and do repairs on time. In this way, you can give value to your tenants and make sure that there are minimal inconveniences as possible. If there are frequent complications in your properties, it makes the tenants dissatisfied and leaves a bad impression on you and the  property itself. Moreover, it is recommended that you keep the property in its best condition at all times.

In Conclusion

We, as humans, always try to take care of things at our own hands. That is something we know that we can do because of Forced Appreciation. Real estate investors can’t afford to sit around and just wait for their properties to increase in value, while they can actually do something to have that increase to manifest. After all, real estate investment isn’t something that we ideally want to sit back on. It is great to be involved with the change and get hands on making sure that your property is at its best value. 

It doesn’t mean that every tip and trick is effective at all times. After all, it depends on the situation if it is applicable to do so or not. With that being said, sharpen your skills with the resources you can get. Real Estate IQ can provide you with tools and webinars that you need in order to create an educated decision if you’re going to engage in forced appreciation with your property investments.

As Qui-Gon Jinn said during Star Wars Episode I: The Phantom Menace, “Your focus determines your reality”. Understand what you have to focus with, and it will manifest itself as your reality. Look into yourself and ask, “Is this the best that I could do?” and if you feel that it isn’t enough, then it is a good reason for you to strive harder to achieve your goals. The power of forced appreciation is just there, waiting for you to see its full potential, but until you aren’t able to see that potential, it slumbers. You have to go out there and learn. And you should be a step closer to being one with the force.

Grasp the power of forced appreciation as REIQ is here to help you out by providing tools and resources to help you to become the real estate jedi! Join us NOW!

Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is intended as legal or financial advice.