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Buying Property – Applying Forced Appreciation

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Real estate investors. Let’s go over force appreciation. So when you’re talking about appreciation, a lot of people are thinking, especially right now, double digit appreciation. And that’s great, you know, and that’s also looking at appreciation as well. But it is a different kind of appreciation. It’s not what’s called forced appreciation.

Force appreciation is basically a term that’s used more so in the commercial real estate that is used to value property based on the net operating income of that property, meaning that if I increase the net operating income of that property $1, there will be a cap rate that’s tied against that and increase the value of the property itself against that cap rate. So that means any increase we have an income, any decrease we have an expenses increases our NOI and our increased NOI increases than the value of the property.

We’re forcing that appreciation. You can most of do this in properties that are known as value add properties. For example, if your rents are very low, it’s mismanaged. It hasn’t been updated in a long time. You can take your time to go in and actually properly manage the property, increase the rents, rehab the units, and you can get something that’s actually really, really nice, which increases your NOI and therefore increases the value of the property.

Now, the problem is a lot of the time you get forced depreciation and that is going to start at a certain level because you can only force so much appreciation. Now, obviously, you’re not turning all of the units every single time and increasing NOI so much every single time. So really it becomes looking at those where you can have that arbitrage of, okay, I’m going to buy this at a really good price. I’m going to be able to put in some money and I’m going to be able to increase my net operating income significantly, which will then turn the dial on the actual property value and increase your equity in that property as well.

So if you like this information, please hit like please subscribe. Look forward to talking to you about more. Thank you

Sunny Advani – Synergy Real Estate & Property Management

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