Appreciation, is one of the often overlooked yet incredibly powerful forces in real estate, and can turn modest investments into goldmines What exactly is appreciation and how does this help your real estate investment strategy? I have to warn you in advance – while making money is fun, this might be a bit boring, however it’s important you to understand these concepts if you are serious about investing in real estate.
Appreciation refers to the increase in the value of a real estate property over time. It is a crucial factor that investors consider before purchasing a property because it directly affects their potential return on investment.
Investors often buy properties with the expectation that their value will increase steadily over the years, allowing them to build equity and realize substantial gains upon selling the property in the future.
Now that you know more about appreciation, how do you determine the rate of appreciation?
There is a quick formula that can help you determine this.
Using an example from data in Port Aransas, Texas, where my partner, Carl, and I sell real estate, you can see how this works.
In January of 2019 the median price for a detached home or detached condo was $519,000.
Jumping ahead 4 years, the median price in January of 2023 was $685,000.
Calculating a 20% down payment with the $519,000 price (if you purchased the property in Jan. 2019, and getting to the January price for the same property at $685,000, the appreciation rate over 4 years would be 7.18%.
You would have made a profit of $166,000, which represents a ROI of 159% after 4 years. After 10 years, if the appreciation rate stayed at 7.18%, the profit would be $519,665, which represents a ROI of 500.00% after 10 years. Keep in mind this doesn’t include expenses, but this is the return on investment based on appreciation. 
In case you want to do this calculation yourself, we’ve posted a link here for the same calculator I used to determine the appreciation rate and that you can use with your own numbers.
https://www.goamplify.com/calculators/home-appreciation-calculator/
But back to that profit of $519,000. Sounds great right? Well let’s look at the market factors that drive appreciation, because chances are, that rate of 7.18% could increase or it could decrease since real estate markets can be cyclical.
There are several key factors that influence real estate appreciation and determining it involves considering a combination of both local and broader market conditions, so what are these key factors?
1. Location: You’ve always heard real estate professionals say “Location, location, location.” Well this is true: the location of a property is perhaps the most critical factor in determining its appreciation potential. Properties in desirable neighborhoods with good access to amenities, schools, transportation, and job opportunities tend to appreciate more quickly than those in less favorable locations.
2. Supply and Demand: Your economics professor probably talked a lot about The law of supply and demand and it plays a significant role in real estate appreciation. When the demand for properties in a particular area outstrips the supply, prices are likely to increase. However, an oversupply of properties can lead to slower or even negative appreciation.
3. Economic Factors: The overall economic health of an area and the broader economy can influence real estate appreciation. Strong economic growth, low unemployment rates, and rising wages generally lead to higher property values. If the investment property you own or are considering purchasing is in a resort community, development often brings restaurants, entertainment venues, and recreational facilities that enhance the overall experience for visitors and residents, making the resort community a more desirable destination.
4. Development and Infrastructure: The development of new infrastructure, such as highways, public transportation, and commercial centers, can positively impact property values in the surrounding areas. And in a resort community, well maintained roads, airports and public transportation systems make it easier for people to access the area and attracts more tourists and potential buyers, leading to a higher demand for properties.
5. Interest Rates: Now that’s something that we’ve all been hearing about on the news and the internet. Low-interest rates can make borrowing more affordable, which can increase demand for real estate and drive-up prices. The opposite is true for high interest rates.
6. Demographics: Changes in population demographics, such as an influx of younger professionals or retirees, can drive demand for housing in specific areas and contribute to appreciation.
7. Market Sentiment: Investor sentiment and consumer confidence can influence real estate prices. Positive market sentiment can lead to increased demand and higher prices.
8. Inflation: While often we don’t usually consider inflation as a good thing, over time, inflation can lead to the appreciation of real estate values as the cost of goods and services rises. And we are certainly experienced inflation over the last several years, so for our personal investment properties, that’s a good thing as it has helped our increase in property values.
9. Renovations and Upgrades: Improving the condition and features of a property can enhance its value and contribute to appreciation. But before you start any renovation or upgrade projects, I would recommend talking to a real estate professional, about what improvements will have the highest impact and best return on money spent.
Overall, understanding appreciation is essential for investors in real estate, as it allows them to make informed decisions about property acquisitions and develop a comprehensive investment strategy tailored to their personal financial goals and risk tolerance.
Local real estate experts can provide valuable insights into specific markets and help you make informed decisions regarding real estate investments. And if you are considering either buying or selling an investment property, it’s important to have a conversation about appreciation with your Realtor®.
For more information or to book a call with us, please check out our website at www.SaltwaterShoresTeam.com or call 361.500.2187.
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This article is not financial advice and should not be taken as financial advice. This video is for information and education purposes only.
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