According to the National Association of Realtors, 99% of tracked metro areas experienced year-over-year price gains in the first quarter of 2021. Of those markets, 89% experienced double-digit growth.
In today’s market, property appreciation is the name of the game.
But how much weight does property appreciation carry, and can real estate investors predict it?
The Value of Property Appreciation
Property appreciation is one of the greatest assets in the real estate investor’s toolkit. Because properties traditionally increase in value over time, real estate has long been considered an investment — even for personal residences.
The idea is that, over time, your property will be worth significantly more than you paid for. As a result, you can capitalize on those gains by selling.
The real estate investor recognizes that property appreciation alone is not a worthwhile investment. Combined with passive investment income, however, it makes for powerful returns.
The Appreciation-Inflation Relationship
Real estate is a hedge against inflation. The relationship between appreciation and inflation is this: when inflation increases, property values increase. Unlike cash value in other types of investments — where inflation eats into the real worth of your money — real estate values increase in time with inflation. Not only will your property values increase, but they will increase in a way that accounts for inflation.
Inflation alone, however, does not determine property values over time. If that were the case, your properties would be worth technically the same as they did when you started — just inflation-adjusted.
Factors That Impact Property Appreciation
#1 Location
Location is the top consideration in any real estate investment. You can categorize location by increasingly specific categories: nation, state, city, neighborhood, and precise location therein. The supply-demand relationship will vary by market, and thus, so will the rate of appreciation. Investors must prioritize locations with a record of population and economic growth as well as access to modern amenities and infrastructure.
#2 Land
Land is the single biggest factor in the appreciation of your property — rather than the physical structure itself. Land is a limited resource and, thus, drives appreciation. The property itself depreciates over time, particularly if maintenance is lacking. This is why we see dilapidated properties selling for millions in certain markets — it’s more about the land and the location than the property itself.
#3 Development
Revitalization and development within a market impact property values. For instance, a run-down neighborhood that is slowly updated and transformed will increase the value of surrounding properties. Commercial development matters, too. Buying in a quiet area that is expecting major commercial and retail additions in the future spells big money.
#4 The Economy
The economy drives real estate supply and demand — and thus, value. Markets with a vibrant, healthy economy attract residents. That means more real estate demand. As we’ve seen over the past year, this demand, when paired with short supply, means rapid appreciation. The local, national, and global economy all impact real estate in some way.
Investors, too, must take into account the cost of living within their markets. Lower wages combined with a lower cost of living will result in lower property values — which can be better for scaling and diversifying one’s portfolio.
So, Can I Predict Property Appreciation?
Yes and no.
The national average rate of appreciation in the United States is between 3 and 5 percent. By this metric, you can reasonably gauge property appreciation over the years. However, certain events can dramatically shake up expected appreciation rates. The Great Recession, for example, caused plummeting property values. COVID-19, on the other hand, caused the vast majority of markets to see double-digit gains.
The best way to predict property appreciation is the keep the baseline in mind while also accounting for your market’s unique characteristics. Local appreciation rates can vary wildly.
Take into account the numbers, trends, and context of your investment market as well as its economic health and future. This will help you best measure expected property appreciation.
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