Factors affecting capital appreciation in properties

My grandmother always told me: You can't lose money in property. You can only sell at the wrong time. Capital appreciation is the main reason why most of us invest in property.

What is appreciation? Why do property values go up? Appreciation is the increase in value of a property over time due to inflation, supply and demand, capital improvements and other factors. Most real estate investors purchase income property for cash flow and capital appreciation. When weighing the benefits of purchasing a home or renting, many people opt to buy because they can increase their net worth via appreciation. The real estate investor should therefore have a good understanding of the factors that cause real estate to appreciate in value. Understanding why real estate goes up in value can help you make more profitable investment decisions. Properties appreciate in value for many reasons. The seasoned real estate investor will look for a combination of factors that will result in high appreciation growth rates

Property values appreciate in value over time due to inflation. Inflation is caused by an increase in the amount of money in circulation. The value of money declines when the supply of money increases and the end result is increased retail prices. The cost of the land, construction materials, labor costs, building permits and fees, etc. go up over time making it more costly to replace an existing property. These factors alone do not guarantee that an income property will increase in value. Factors such as poor upkeep, the general decline of an area, economic obsolescence, reduced demand, increased crime levels, etc. can cause properties to decline in value even when replacement costs are increasing. In summary, personal residences and income property usually appreciate in value over time due to inflation because the cost to replace them has increased.

You can increase the value of real estate by making cost-effective improvements. Improvements such as siding, a new roof, a new addition, new carpeting, landscaping, paint, etc. can increase the value of both personal residences and income property. Some improvements, dollar for dollar, will result in a greater increase in value than others. You should plan carefully and make improvements that result in the highest level of appreciation for the dollars that you spend. Keep in mind that if you make too many costly improvements, you might not recover those costs when you sell. Small improvements can sometimes deliver the greatest bang for your bucks.

Supply and demand can cause the value of real estate to go up or down. Over supply can cause real estate values to fall and undersupply can cause prices to appreciate. Demand for real estate can vary greatly in different areas of the country and in different areas of a city. The demand for real estate is affected by the availability of jobs, the level of interest rates, availability of land, proximity to shopping, schools, parks, churches, etc., infrastructure improvements, population changes, desirability of an area, crime levels, property tax rates, zoning changes, etc.


Are mortgage rates increasing or decreasing? The general level and the direction of interest rates can greatly affect the demand for real estate. As mortgage rates increase, the demand for real estate decreases and vise versa. Higher interest rates translate into higher mortgage payments for single-family home-buyers and inadequate cash flows for income property investors. Falling mortgage rates result in greater demand for real estate and faster appreciation.

Over supply of a particular type of income property can result in high vacancy rates and reduced cash flows making it difficult for property owners to meet their financial obligations. The end result is lower prices. Ineffective property management and poor property upkeep can also result in high vacancy rates. Correcting managerial problems that improve operational efficiency and increase the bottom line can have a positive impact on the value of an income property. Be sure you understand your local real estate market place before you buy. You can correct a mismanagement problem, but you have little to no control when an oversupply problem exists.

Is the job base in your community growing or is it declining? The availability of high paying jobs can greatly impact appreciation growth rates. If good job opportunities are available in an area, the demand for real estate will be high. People will move to the area to take advantage of job opportunities. The end result will be increasing real estate prices.

The location of a property can affect how fast it appreciates in value. Water properties have been increasing in value at a fast pace. There is a finite amount of water property available in the United States and demand has been increasing. More and more people are reaching retirement age fueling the demand for recreational property.

The proximity to recreation such as golf courses, cultural facilities, parks, universities and colleges can result in a higher rate of appreciation.

Low property taxes can increase demand for real estate. Many areas of the country that have low property taxes are experiencing high population growth rates and high appreciation rates.

Is the local economy expanding? Changes in the infrastructure of an area can have a large impact on the demand for property. Proximity to shopping centers, schools, hospitals, jobs, police and fire protection, public services, etc in most cases will increase the demand for real estate. An increase in infrastructure in a town or city usually translates into more jobs and greater demand for real estate. The smart investor will take advantage of infrastructure changes.

Is the population growing in your area? Population increases usually translate into higher real estate prices. The demand for real estate in general has been increasing over time due to population increases. The population of the United States has been increasing every year. The amount of land is not increasing and the number of people looking to buy is.

The level of new housing starts is a good indicator of the demand for single-family homes. If the level of new housing starts in a particular area of the country is high, home prices will likely be increasing. To understand the long-term picture, the investor should determine what is driving the demand and if will it continue. Note that the level and direction of interest rates have a big impact on new housing starts.

Economic conversion which results in a change of use for a property can have a positive or negative impact on the value of real estate. Several examples of changes in use would include the conversion of apartments to condominiums, the construction of a restaurant bar in place of a commercially zoned personal residence and the conversion of a personal residence to a bed and breakfast.


I have listed a few of the reasons why real estate appreciates in value. As a real estate investor, you should be looking for a combination of the above factors that will result in a high level of future appreciation. Be sure to take advantage of leverage to compound the affects of appreciation. Leverage is the use of borrowed money to increase real estate profits. You can compound your real estate gains by using leverage effectively.