Property values have grown impressively nationwide during the last few years, so you may be hearing a lot about appreciation in today’s market. But you might have questions, like
- What is appreciation in real estate?
- How do I calculate appreciation?
- What is a good appreciation rate?
- Can I force appreciation?
The real estate experts here at Gatsby real estate have answers to all these appreciation questions and much more! Here’s what you need to know about appreciation in real estate.
Definition of Appreciation in Real Estate
Appreciation is growth in the value of a property over time. As your home value increases, it is said to appreciate. Property appreciation is important because real estate is an investment, and property owners expect their property to be more valuable today than it was when they purchased the property.
Higher property values can lead to higher profits when you decide to sell real estate investments. Higher property values can also lead to justifiable rent increases, which can create additional passive income for you as the property owner.
Appreciation also gives you more equity in your property. Equity is simply the value of the property that you own (as opposed to the value of the property owned by creditors like your mortgage lender). Your current property value minus any debt on the property is your equity. And equity is important because you can borrow against your home equity to fund property renovations, pay off higher-interest debt, or finance a new investment property to grow your portfolio!
Why Does Real Estate Appreciate in Value?
Real estate appreciates in value for a few different reasons.
- Limited supply. With limited land available for development, real estate has an inherent scarcity level that drives increasing values.
- High demand. Most people want a piece of property to call their own, so parcels of land are always in demand, which further drives values up.
- Inflation. Healthy economic growth means that prices of consumer goods rise over time. Real estate values grow during periods of inflation, making real estate investments an excellent hedge against inflation.
- Renovations and upgrades. In addition to the natural value-increasing drivers of the real estate market, property owners can force appreciation by adding value to the property through renovations.
The opposite of appreciation is depreciation. Depreciation typically refers to the deterioration of a structure over time. All building materials have a useful life, and older buildings can be less valuable because they have less useful life left. Depreciation rates depend on the materials used to construct the building and the quality of maintenance and repairs to the structure.
It’s important to note that structures can depreciate, but land does not. It is possible for land values to dip temporarily in response to current economic factors, but over time, land values will always trend up.
Interestingly, depreciation of the structure works in the property owner’s favor with regard to income taxes. Property owners are allowed to deduct calculated depreciation from their annual income taxes to reduce their income tax burden. This is just one of many tax benefits of real estate ownership.
What Is the Average Real Estate Appreciation Rate?
The average appreciation rate for real estate in America is 3-5%.
But this can vary widely from year to year. In 2022, for example, the year-over-year appreciation rate for the average American home was 19.1%!
The rate of appreciation also varies widely from state to state. For example, the average appreciation of real estate in California from 2021 to 2022 was 21.27%. This is just one of the reasons why California is one of the best states for real estate investing. New York State, by comparison, was well below the national average at 16.67% for the same period.
Local markets within a state can also have wildly different appreciation rates. In California, for example, more affordable cities are appreciating faster than expensive cities. But we should note that, while high-value markets like Los Angeles might have a lower appreciation rate (15.9% appreciation in 2022), they may offer greater profit margins from rental income. It’s also worth noting that a 15.9% return on an $800,000 LA home equates to a higher dollar value than an 18.9% return on a $400,000 Riverside County home. This is why Los Angeles is still one of the best cities to invest in real estate, even with middle-of-the-road returns.
How to Calculate Appreciation in Real Estate
To calculate the appreciation rate of a property, simply divide the change in value by the starting value. Then multiply the result by 100 to convert it to a percentage.
You can calculate appreciation for any time period you’d like.
If you want to know how much a property has appreciated since you purchased it, for example, you would use the change in value from the purchase date until today. And your starting value would be the purchase price.
If you want to know the year-over-year appreciation rate, you would use the change in value from the past year, and your starting value would be the value of the property as of one year ago.
Appreciation Calculation Example
Let’s say you want to calculate the year-over-year appreciation for your property, which is worth $750,000 today. On this day last year, the property was worth $725,000.
To calculate the appreciation rate, you first need to determine the change in value. In this example, $750,000 minus $725,000 equals $25,000. So $25,000 is the change in value. Now we just need to divide that by the starting value. $25,000 divided by $725,000 equals .0345. Multiple that by 100, and we find that the appreciation rate in this example is 3.44%.
Adding Value to Real Estate to Improve Appreciation
There are many ways to add value to real estate, which can force appreciation.
Building on a vacant lot, for example, dramatically increases the value of the property in a short time. In most cases, the value added by the building exceeds the cost of the labor and materials for the building, resulting in a solid return on investment and a net worth boost for the property owner.
You can also add value to existing structures through property expansions, home improvements, and renovations. This type of forced appreciation instantly increases the equity you have in the property as well as the value of the property itself.
Take Advantage of Real Estate Appreciation with Gatsby Investment
The only potential downside of appreciation is that it requires either time or money. You can either wait for your property to grow in value over time, or you can invest your time and effort in a renovation project that will force appreciation.
But Gatsby Investment, the LA-based real estate investment company, is offering an option for real estate investors to take advantage of quick appreciation without any time, skill, experience, or effort required.
As a real estate syndicator, Gatsby pools funds from multiple investors to complete value-add projects like house flipsand multi-family developments. Our team of award-winning architects, builders, and designers does all the work, and the investors get to share the financial benefits!
Short-term investors can get in at the ground floor of these investments and cash out when the project is complete, taking full advantage of the instant appreciation achieved by the renovation or build. Long-term investors can invest in a multi-family build-to-rent project, which allows you to retain your stake in the investment into the rental phase. This means you get to share in the instant appreciation of the build phase plus the long-term appreciation over time and the passive rental income!
And because Gatsby pools funds from multiple investors, you can buy into a deal with low minimum investments of just $10,000-$25,000. Check out our available investment projects, and take advantage of real estate appreciation today!