The thing most said relating to real estate, has to be “Location”. While it certainly feels oversaid; it’s overuse is for good reason: Because location affects Appreciation. Equity is a direct result of Appreciation. And we like equity...like a lot!
Appreciation depends on two things:
The local real estate market and any improvements done to the property. As real estate investors, we want to use both of these tools to build wealth; but we are discussing the tool of leveraging local real estate markets in this guide. Or Location, Location, Location.
Property appreciation tends to go up, fairly reliably for the most part, all on its own; but I am talking about capitalizing specifically on the fact that the location itself will have an extreme impact on the property appreciation. And that’s under your control and something you can utilize to maximize - even super-size your investing.
Here’s an example that illustrates the power this tool has on your investing: A property worth $150,000 today, will be worth $4,500 this time next year, if it's in a neighborhood that appreciates just 3%. But that same house will be worth $6,000 if it’s in a different neighborhood that appreciates at 4%. Just one percent has a very big impact. In five years that becomes an $8,000 difference.
But that’s not it - At the time I’m writing this real estate guide article on appreciation, Philadelphia has seen an overall appreciation this year of 3.56% (as usual beating the national average). But we had neighborhoods with median home prices go down as low as minus 8.4%, and go up as high as plus 91.8%.
So we are not just talking about a 1% difference in appreciation.
Imagine buying a property for $50,000 and in just 3 years it is worth $150,000? Is that realistic? Very much so and it happens all the time. And that’s why you should be using the tool of locational appreciation as you invest in property.
Investing in real estate has multiple wealth creation advantages, unlike other forms of investing. There is Leverage, where you are making money, using money that’s not even yours. There are the Huge Tax Benefits, where you are making a fortune by avoiding paying taxes entirely and there is the added dynamic of Location Appreciation (which actually ties into the other two).
Like the other wealth creators found with real estate investing, Location Appreciation is close to passive in effort, especially compared to the large financial returns you’ll make. There is some effort; but that effort can merely be had in as little as a few hours. You basically only have to determine what areas will likely be appreciating over the next several years. Then continue to invest in these areas. If you are really smart, you will also take the time to determine what areas are likely to depreciate, and begin re-positioning any investments you have from these areas. If you are really, really smart, you will determine both of these, long before anyone else realizes it, so you can take the huge early appreciation advantage!
Some call this speculation and it is. But “speculation” makes this sound far more difficult and risky than it is. And it's not difficult. Real estate investing is always far more science than it will ever be art. As far as the science part goes, its real estate; not rocket science. Real estate is many things; but complicated isn’t one of them.
Simply put a neighborhood is either getting better, or it's getting worse.
Nothing in life can stay exactly the same. Something is either getting better, or it's getting worse; and real estate investors realize this and it's one of the big wealth builders they use. A key to making a lot in real estate, with very little effort, is simply to buy in the right area. Find the next hot area and you hit the real estate investor jackpot!
Tremendous appreciation, is a valuable tool to build your property portfolio quickly; and it's easy!
You simply need to take a moment before you purchase property to determine where you should buy - what neighborhoods are appreciating and what neighborhoods are depreciating.
Tips to determine if a neighborhood is appreciating:
- It's Close to the Current Hotspot. Called a Spillover Market. Property investors build a strategy around a neighborhood. They buy a shell, renovate it, rent it out or sell it. Then they buy another shell property. But eventually they run out of shells; so they have to push the borders farther and farther. I look for areas that are several blocks away from where homes are currently being renovated; knowing that those developers will soon run out of properties, they will then have to expand their area, they will see my renovations, and they will join me, running up the values for my property.
- The Media. Be the second one in the door. I think the number one way to gauge if a neighborhood is about to aggressively change is the media. If they say a neighborhood is going to be the next hot neighborhood, it makes it so. Once said out loud, experienced property investors begin in the area. Then comes the less experienced investors and the contractors providing themselves with work by doing their own flips. These investors take the least expensive properties they can buy on the block and renovate them into the most valuable properties on the block. Then came the developers who turn the worst properties of all, the trash-filled lots and turn them into modern home palaces. Also the media causes mass gentrification. If they say a neighborhood is okay to live in, then people move in.
- Opportunity. If you see a mix of new renovations and shell properties on the block, this is a sign the block is about to change. The real opportunity for values to soar is in the shells. These properties have the most leverage to change the block. If you buy while there is still plenty of opportunity for other investors to buy, you will likely see very nice carry along appreciation. Renovate the worst house on the block and all the property values go up. Buy a property when the block is still ugly, with only two renovations on it and with three shell properties on it. Investors will often flip shells after they see another developer has done so 1st and paved the way. “If you think it's safe, so will I.”. Two renovations on a block, leads to five, very quickly.
- Follow the Young, “Cool” Culture. Artists, gays, hipsters - say what you will, they clearly lead the gentrification charge into hot new neighborhoods. Why? They spend money. Amenities are the big appreciators of neighborhoods. Cool gastro pubs, coffee shops, shops all bring huge change that create value for property.
- Track Completed Property Transactions. This certainly takes considerable more effort; but this effort will pay you very, very well. Ask a real estate agent to send you a Completed Transaction Report from the MLS each quarter. What you are looking for is what the experienced, deep pocketed investors are doing. Often, experienced property investors will identify a choice area and will quietly buy heavily in the area; long before prices go up. Then they wait. If you buy between when these investors buy and before the media announces “this is the next big, hot area”; then you are now, a next level, master property investor - with the bank accounts to prove it.
- Track Property Construction. If you want to go Next Level, go to your local city or county building permit office, and ask for a copy of the last year's property permit application/approvals numbers. Are they on the rise? Another good indicator.
- Desirability Creates Demand. In 2008, when real estate everywhere took significant dips, Philadelphia’s Chestnut Hill continued to climb up in price. Philadelphia’s desire to live in this neighborhood drove it to appreciate; even when the national economy kept saying otherwise. I always look for things that make a neighborhood desirable. Amenities like good schools, night spots, parks, accessibility to the neighborhood, public transportation are all factors.
Depreciation & Equity Re-Positioning:
Like the man sang, you gotta know when to hold-em, know when to fold em…
Savvy real estate investors use speculation to buy property in neighborhoods that are likely to locationally appreciate; but not many investors use the same tool to also sell properties in neighborhoods that are likely to depreciate.
What goes up, must go down and buy low and sell high. But most of us don’t do that. Why? Because real estate tends to appreciate naturally. So even if you are losing out on neighborhood locational appreciation, you might not notice your declining equity returns, since you are still getting some returns, or, at least, no losses. Or you might be getting losses; but you aren’t trained to track the properties you have already invested in.
But if you use Equity Re-Positioning, by swapping properties into better appreciating neighborhoods then you are going to realize some considerable equity returns. Go back up to the numbers in the paragraph 4-6, and see what you might be losing, and what you might be gaining.
Also Called Gentrification
To some people it's a good thing. To others gentrification is a bad word. The reality is: a neighborhood can not survive a decline with any real duration. Eventually roofs and windows give in. Tree roots infiltrate foundations and houses have to be torn down for public safety - all at taxpayer expense.
Then long term residents of these neighborhoods see their property values dip lower and lower, no matter how well they maintain their own properties. Most cities have entire neighborhoods with several unsafe, empty lots where properties once stood, that once brought in property tax for schools, parks, streets and amenities.
On the flip side gentrification increases taxes, and while that does ultimately help an area, it can push distressed long term residents out. There are two sides to gentrification. But ultimately, increasing value to a neighborhood always stands to the front of my mind.
Property investing is an incredible wealth generator; but there is something incredibly soul improving, saving a property from being torn down, greatly improving a neighborhood.
As always - Happy Investing!