Exploring the Factors of Forced Appreciation
As you may already know, forced appreciation is just one of many useful approaches in multifamily property investing. In this sense, investors will have to make full use of this tool to make the most of their property acquisitions.
Let’s first define what forced appreciation actually entails.
First and foremost, it allows you to improve the look and feel of a multifamily property. Repairing or improving certain aspects of a multifamily property is considered a form of forced appreciation.
If anything, forced appreciation is different from market appreciation. Forced appreciation depends on the decisions of the property owner. Market appreciation, on the other hand, depends on external factors such as job growth and population growth.
Often, market appreciation can convince property owners to perform value-adding activities. This results in an increase in the net operating income or NOI, and the value of the property itself.
Let’s look at the four factors that allow forced appreciation to take place:
Increases in property sales prices can be a reason to raise the rent. For this, you will have to be vigilant of market performances. You may also analyze the impact of policies affecting the property market. High interest rates, for example, can tighten property expenditures and lead to higher rent.
Consistent market growth
Aside from inflation, you may also want to keep tabs on the growth of the market itself. A balanced supply-demand ratio will definitely lead to better rental rates. Moreover, the overall health of the national economy can also be a factor for growth in the real estate market.
Higher job growth and rising wages mean that more people can afford to live in apartment complexes. This creates a high demand regime where there is a higher median rent.
Providing more amenities to Residents
Increasing the value and benefits for the residents brings more rental income and consequently increases Value. Another common way to increase income is through a ratio utility billing system or RUBS.
Shortage in inventory
A shortage in the supply of apartment complexes can more or less lead to forced appreciation. Property owners will have to consider raising the rent in response. Tight inventory supply provides ample opportunities to raise the NOI of your property.
In order to leverage forced appreciation, you will have to find a good property manager. Aside from collecting rent, a property manager will also oversee the overall health of your property.
Moreover, the property manager can also implement renovations on your behalf.
In my case, I would run my own property management companies. This allows for more control over the health and performance of my property.
Forced appreciation is, after all, one way for you to secure your multifamily investment and make sure that it delivers on your income goals. Understanding this concept is just one of the things you have to do in order to grow your business.