Most people are familiar with appreciation—a value increase over time—but what does forced appreciation mean and how could it be benefit your investment approach? This article will help you understand these things a little better and help you to find opportunities for forced appreciation in your investments.
What Is Forced Appreciation?
In commercial real estate, income producing property is valued by dividing its net annual income by the market capitalization rate. What this means for a savvy investor is that any time you increase the income of your property, you also increase its value. This is perhaps one of the most powerful tools a real estate operator can use to quickly increase their equity.
Forced Appreciation in Multi-Family Investing
Multi-family valuation is based primarily on the property’s Net Operating Income (NOI). Therefore, anytime you increase a property’s NOI, you directly increase the value of the property. You can do this in one of two ways; increasing income (rents, utility bill-back, etc.) or decreasing operating expenses (utilities, repair costs, administration costs, etc.).
By seeking out multi-family property with either property management inefficiencies leading to high expenses, or properties with proven value-add potential (whereby similarly classed properties in the same sub-market which have received interior unit and/or common area/amenity improvements are achieving significantly higher rents) an investor can implement an appropriate strategy to capitalize on these opportunities.
Through empirical data, market research, and financial projections, Creative Realty Partners seeks out undervalued multi-family investments in locations that have significant potential for growth. Using this approach, we’re able to identify opportunities that provide our investors with the greatest cash-on-cash returns and upside potential.