3 Types of Appreciation in Real Estate

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It is easy to think of appreciation in real estate as monolithic.  But there are different reasons why properties appreciate:

1)  Inflation appreciation:  Over the long-term real estate prices have tended to rise.  In fact, the median price of a house in the United States in 1975 was $38,600.  In 2012, it is $171,250.  Prices of all assets generally increase over time due to this inflationary effect and real estate is no exception.  If it is rising for this reason alone more than the Consumer Price Index you are coming out ahead.

2)  Demand appreciation:  This is a localized area where the demand for housing in that area exceeds the supply, forcing prices up.  These areas include those with good schools, access to mass transit, trendy restaurants that you can walk to and popular tourist destinations.  Especially when there is very little possibility to add properties to that location and the reason for the demand is strong these areas are a good bet.

3)  Forced appreciation:  You force appreciation by improving the property and increasing the rents.  You add value by making it a nicer place to rent or buy by a larger increment than it cost you to fix it up.

The best opportunities are when you can capitalize on all three types of appreciation.  Find a hot area, with a property that needs some cosmetic work, at a time with some real estate inflation and you'll hit a home run.