One of the best ways to profit from real estate investment is appreciation—the gradual increase in a property’s value over time which will be realized as a capital gain when you sell the property. However, appreciation is largely driven by slow macroeconomic factors (employment rate, taxes, interest rates, etc.) which are generally out of an investor’s control.
Thankfully, real estate investors have the option of taking matters into their own hands, which is where the concept of “forced appreciation” comes in.
What is forced appreciation?
When you invest in stocks and bonds—unless you are a high ranking employee at the company or hold a seat on the Board of Directors—your ability to add value to your investment will be limited. With real estate, however, you don’t have to wait for natural appreciation from changing market conditions. Rather, you can “force” appreciation by making improvements to the property. This allows you to directly control the property’s success through various hands-on strategies.
For instance, you could purchase under-managed properties from “mom & pop” owner/operators at a discount to their real value and then realize that real value by installing professional management in those properties. By making that simple change, you may be able to increase rental income, reduce vacancies, and ultimately increase the value of your investment.
Strategies for forcing real estate appreciation
Class B and Class C properties are typically the best candidates for forcing appreciation. Investors should seek out properties that require some level of physical improvement and/or managerial changes.
Some common strategies for forcing appreciation:
- Improve the amount and usage of space on the property—This can be done by converting multiple small units into a few larger ones, or changing unused space into livable space or common areas such as patios or balconies.
- Improve the interior—Update kitchens and bathrooms, replace flooring, purchase new appliances, etc.
- Improve the exterior—Planting trees and flowers, replacing unsightly fencing with attractive alternatives, and upgrading the general landscaping can help improve curb appeal and attract tenants.
- Add amenities—Built-in storage, in-unit washers and dryers, an extra powder room, safe and secure parking, or an on-site gym are just some of the possibilities.
- Reduce operating expenses and inefficiencies—This can be done, for instance, by implementing energy efficient HVAC systems and appliances along with careful selection of building materials.
An added benefit for multifamily investors
When it comes to forced appreciation of multifamily real estate, compared to single family real estate, investors get the added benefit of economies of scale. Let’s take a look at how this works.
A single family home consists of 1-4 units.
When you make improvements to that single family home (such as renovating the kitchen, adding a bedroom or bathroom, etc.,) you are working to increase the value of those 1-4 units.
Great, isn’t it?
Multifamily housing, on the other hand, consist of 5+ units. And investment-grade multifamily real estate is often comprised of 50+ units.
What if you make improvements to a common area in that multifamily property (e.g. landscaping the exterior, renovating the gym or lobby, etc.)? Now, that one improvement acts to increase the value of 50+ units, not just 1-4!
Multifamily real estate, relative to single family real estate, allows you to benefit from improved efficiencies and lower unit costs which can help increase the overall ROI that you achieve from your investment!
How we leverage the power of forced appreciation for our investors
Forced appreciation is one of the most powerful tools available to multifamily real estate investors. At Birchstone Investments, we seek properties with a value-add component, such as deferred maintenance or poor management, resulting in under-market rents and high vacancy rates. Typical value-add propositions include unit renovations such as upgrading appliances; updating kitchens, baths and flooring; and enhancing the beauty of the property with such things as professional landscaping, exterior paint and parking lot resurfacing. Additional improvements may include implementing a tenant bill-back system for certain utilities to encourage tenants to be environmentally conscious. BSI partners with professional property management firms to ensure better maintenance, rent collection, and tenant relationships. When necessary, we may completely rebrand the asset.
Our goal is to maximize the net operating income (NOI) of each investment by increasing revenue and streamlining expenses for existing properties. The ultimate goal of each of these value-add programs is to stabilize occupancy at 95% or better and achieve increases in rents to resemble current market rates. This process of repositioning properties through operational efficiencies, moderate to extensive renovations and complete rebranding allows BSI to realize improvements in overall cash flow that can be shared with our Investors and also increases the value of the asset.
If that is aligned with your personal investment goals, and you are interested in learning more investment opportunities with BSI, we encourage you to join the Birchstone Investor Community today.