Why Does Property Increase In Value Over Time?

In real estate investing, appreciation is the increase of the investment property's value over time. There are many factors that cause real estate appreciation, here are the 6 most important ones:

1. Land

Land does not decrease in value as it ages; on the contrary, it is the main factor that drives real estate appreciation. As the population is constantly increasing, more people are looking for homes, more and more properties are getting built, and land becomes more limited and more expensive.

2. Location

The second factor determining real estate appreciation is closely related to land. Real estate property value at any point is a function of supply and demand, while the appearance, the functionality, and the maintenance of the physical structure have a lesser impact. Location is the key! Location refers to many aspects – the state, the city, the neighborhood, the exact place within the neighborhood. Locations within markets with higher population growths, better economies, more developed infrastructures, and off main roads are in higher demand and are also more likely to provoke real estate appreciation in the future.

3. Future Development Plans

The currently existing infrastructure will significantly impact the market value of your real estate property at the moment. In addition, though, you should also study the governmental and commercial plans for the further development of the area in the future. If you buy a decent house in a neighborhood which is scheduled to undergo major infrastructural and commercial developments (connection with the city, schools, hospitals, banks, restaurants, etc.) in the next 5-10 years, you are guaranteed to benefit from massive real estate appreciation.

4. The Physical Structure

Although the structure and functionality of the building are not the #1 factor in real estate appreciation, they still do matter. In general, smaller and less attractive properties tend to appreciate faster. There is a pretty simple explanation for that, once again related to land. Let’s say you have two houses on equal land parcels next to each other, one of the houses being twice bigger and thus more expensive than the other. Both land parcels will appreciate by the same amount over a certain amount of time. So, while the bigger house will gain for example only 10% in value, the market value of the second one will rise by 20%. It turns out that the smaller, cheaper house provides a better return on investment.

5. The Economy

The local economy, the national economy, and the global economy. Investment properties in more vibrant local economies will appreciate more over time.

6. Interest Rates and Lending Guidelines

Another important factor which will influence not only your property’s appreciation but the whole housing market is the interest rate and the related lending guidelines. If interest rates were pushed up, people will be less able to afford loans, which means that real estate prices will go down. In reverse, lower interest rates will push prices up as more people will look for homes. Similarly, tighter lending guidelines will disqualify any potential buyers. Loosening guidelines, on the other hand, will make it easier for more people to afford buying a home, which will bring prices up.

 

credits: Peter Abualzolof

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