Reasons to Focus on Real Estate Appreciation Over Other Financials
When it comes to investing in real estate, there are a couple of different strategies popular amongst investors. The two primary competing modes of profit are cash flow and appreciation.
While many seasoned real estate investors champion leveraging real estate’s cash flow potential, it can come with a few hefty drawbacks. Alternatively, shifting your strategy toward an appreciation-based model is much more sensible and can have tremendous upside.
Much like an investment plan for diversifying across other types of assets, including stocks, bonds, and mutual funds, there is no cookie-cutter, one-size fits all approach to investing in real estate. However, here are a few core reasons why taking an appreciation-centric approach could pay off over time.
What Do Appreciation Strategies Look Like?
One of the main reasons savvy millionaires and billionaires like to invest in real estate is that it grows in value, or appreciates, over time. Focusing on real estate appreciation is a popular strategy because it's often used in a passive manner.
Pros of an Appreciation Strategy
Simply owning real estate over an extended period (assuming it's maintained) can net you hefty profits when you go to the borrower or sell. Historically, real estate has appreciated at close to 4% per year nationally. Doorvest homes perform better, ranging between 6-8%.
Thinking about it from a practical standpoint, people will always need somewhere to live, and, despite the myths, you don't need a ton of capital or pristine credit to get wealthy through appreciation.
It’s important to note that leveraging an appreciation-focused strategy requires patience. How long it takes you to get a decent return on your investment is something to seriously consider. Under normal conditions, it can often take some time before you get your big payoff.
But choosing appreciation over other financials doesn’t always mean you have to wait years to rake in big profits. Some investors choose to accelerate gains by orienting their appreciation-based strategy so that it's a bit more active.
There are several other ways to accelerate the appreciation of real estate property. Tactful investors choose to try and explore ways to add a ton of equity to a property through upgrades and improvements.
Fix-and-flip, as well as fix-and-rent strategies, are widely popular among those who aren’t afraid to take some risks and get their hands dirty. While it can take a keen eye and a bit of hard work, using these investing models can amplify your return on investment.
With a Doorvest home, improvements will already be made to the investment property; making it rent-ready for you to collect rental income from day one of closing. Our renovation quality is guaranteed to give you peace of mind, and we will cover any unexpected renovation costs within the first year.
Cons of an Appreciation Strategy
Working to increase your property’s appreciation potential can also come with a few drawbacks.
For starters, your returns might not be as consistent. Costs and market conditions are always changing. If you finance your improvements but cannot sell forcing you to pivot your exit strategy, then costs can really eat into your profits.
It's also equally important to consider any tax implications that could be associated with short-term gains as opposed to long-term capital gains from a buy-and-hold strategy.
Appreciation doesn’t have as much of a tax burden compared to a cash-flow strategy. For example, there is the option to defer capital gains and depreciation recapture once you sell your rental, so long as you purchase a replacement property within six months of the sale.
Why Focus on Appreciation vs. Other Metrics?
Historically, focusing on real estate appreciation over other financials tends to be a more conservative investment strategy. Especially when navigating turbulent market conditions, it can be beneficial to adopt a strategy centered around fundamentals.
Recent industry data forecasts home price gains to pull back slightly, however, predictions still anticipate national appreciation rates to be around 3.8% by the start of 2023 (Forbes).
It wasn’t long ago that real estate appreciation hit a 45-year high (Forbes). Evidence suggests that the market should maintain this momentum in subsequent years. In addition to consistent appreciation rates, flexibility is another added benefit when utilizing an appreciation-based strategy.
For starters, leveraging growing equity can be a great way to expand your portfolio and acquire new investments. Having the option to borrow against that new equity in the form of a cash-out refinance or a home equity line of credit can be extremely beneficial.
Similarly, since you aren’t relying as heavily on cash flow as your major source of return on investment, you can mix up the management of your property how you see fit.
If you want to understand how much your investment property will appreciate in value, check out this Home Appreciation Calculator for breakdowns and visualizations. for appreciation breakdown and visualization.
Conclusion
Current market conditions can make it challenging to find the right real estate investment strategy. Focusing on appreciation over other metrics is certainly a conservative approach that can help you weather dynamic markets.
There are always advantages and disadvantages to any real estate investment strategy. When analyzing an investment opportunity, it is always prudent to approach it from a variety of different angles.
An appreciation-based strategy offers a solid return on investment, added flexibility, and potential tax advantages over other models. Ultimately, you will want to choose a strategy that meets your financial objectives.
If you are looking to explore your options, schedule a call with a Client Partner at no cost and they will help you find an investment property that fits your financial goals.
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