Benefits of Investing in Real Estate Even When Interest Rates are High
While many real estate investors are retreating from the market due to the mortgage interest rate environment, seasoned investors know that now is still the time to invest in new real estate ventures.
It's understandable for some investors to feel apprehensive about real estate markets given the trajectory of interest rates. Nevertheless, the single-family rental market continues to show signs of significant strength. Remember that for decades, real estate has remained a pillar for investors to build wealth, even during economic downturns.
The challenge that most real estate investors face is being able to shift an investing mindset dominated heavily towards a cash flow and realign it to a smarter model that gives more weight toward real estate appreciation.
Since the inception of Doorvest, we have also been an advocate for real estate investors who are looking to build wealth through real estate by leveraging appreciation.
Let’s take a deeper dive into the importance of real estate appreciation, what influences this key metric, and the benefits you can reap from an appreciation-based investing model.
Importance of Real Estate Appreciation for Investors
There has been a long-standing debate amongst real estate investors over whether a cash flow or property appreciation investing strategy is the superior model.
Many investors seem to over-emphasize cash flow when making real estate investment decisions. But it's no secret that property appreciation has historically performed well (conservatively reaching 2-4% annually), especially in markets with sustainable rental demand.
Over the last 10 years, cities like Dallas and Atlanta have both experienced some of the highest appreciation rates across the country; having grown by 135.63% and 142.22%% respectively (Neighborhood Scout).
Other areas like San Antonio and Columbus have grown slightly slower, but still outpace the majority of the markets nationally, boasting similar decade-long appreciation trends of 108.17% and 106.96% (Neighborhood Scout).
Furthermore, as market conditions shift, relying on cash flow as a means of return on investment becomes much riskier. For example, it becomes more difficult to find cash-flow rentals, especially in areas experiencing higher property appreciation. Being more capital-intensive could put pressure on your liquidity, which is also an important consideration given current economic headwinds.
Additionally, a cash-flow strategy also relies more heavily on resident quality compared to appreciation. In particular, inflation can cause stress on household budgets, and lead to resident-related issues including broken leases, rent collection, and vacancy.
Not only that, rising rate environments mean higher borrowing costs which can further impact your ability to maintain a cash-flow positive, or even cash-flow neutral, property.
The evidence is clear that tailoring your real estate investing strategy around property appreciation can have huge payoffs, especially if you can identify powerful markets with growing populations and strong labor markets.
If you don’t have the time to do your own tedious research on which markets might offer favorable returns, consider delegating or eliminating the work of vetting new markets for appreciation growth potential to Doorvest.
Doorvest has already identified key markets that have substantial property appreciation growth potential, including those already mentioned as well as metros like Houston and Oklahoma City. Sit back, relax, and take advantage of property appreciation by using Doorvest to invest in rental properties located in strategic areas across the country.
5 Factors That Influence Real Estate Appreciation
There’s no one investment strategy that fits every investor’s financial needs, although one centered around real estate appreciation is certainly a contender. There are several factors that influence property appreciation growth which, when considered correctly, can help yield greater returns on investment.
1 - Property Location
One of the biggest facets of an appreciation-based real estate investment strategy is a property’s location. You want to make sure you invest in real estate located in desirable areas. Focus on places with growing populations and employment opportunities.
2 - Property Characteristics
The characteristics of the rental you own could play a part in how fast it appreciates over time. For example, data suggests that smaller homes appreciate faster. Also, properties with more bedrooms (greater than three) have also been noted to appreciate slower. Even your property’s view could play a part in its appreciation potential (Realtor.com).
3 - Economic Conditions
The economy’s performance can have an enormous impact on property appreciation trends. Real estate markets with higher demand for rental properties are certainly attractive for an appreciation-based investing model.
4 - Local Amenities
Property amenities certainly influence the value of your home. For example, fixtures and improvements can help it appreciate faster. Similarly, if your property is near local attractions such as a shopping district, school, or park could help fuel its appreciation rate.
5 - Real Estate Market Trends
Changes in the market can impact property appreciation. Those properties that are trending will typically see higher demand and prices, which help drive appreciation.
How to Calculate Your Real Estate Appreciation Rate
Real estate appreciation is simply how much your property has increased in value over time. In general, the value of real estate tends to go up over time.
To calculate appreciation value, all you have to do is take the current value of your property and subtract what you originally paid for it.
Once you have the difference between the fair market value and the original purchase price, divide the total by the original value of your home. Using a real estate appreciation calculator can make the process of calculating your appreciation per year even simpler, requiring only a few of the same data points.
To use the calculator, first, simply input your original purchase price and what percent you put down to acquire your rental property. Next, determine how long you have held or plan to hold your investment. Lastly, input how much you plan to sell your property for. Finally, after inputting all these data points, the calculator will automatically calculate your annual appreciation rate.
Furthermore, all Doorvest home profiles have an appreciation calculator baked into their projected home values. For example, check out this home profile in Houston, Texas.
(Note: This is an example of a Doorvest Home Profile, and this home may not be available for reservation.)
Determining your annual appreciation rate using the manual method, a real estate appreciation calculator or a Doorvest home profile can help you understand your overall profit and return on investment (ROI) for any given investment property over time.
Conclusion
No matter how crazy interest rates get, the one rate that real estate investors should really care about is a property’s real estate appreciation rate.
Real estate continues to be a strong investment despite current market headwinds, and an investing strategy centered around property appreciation is the key to building wealth through rental properties.
There are a lot of factors that impact property appreciation. Whether you're a new or experienced real estate investor, Doorvest can help create an appreciation-based investing strategy customized toward your financial objectives.
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