What is Capital Appreciation in Real Estate? |
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What is Capital Appreciation in Real Estate?

By: Gregg Cohen, CEO, JWB Real Estate Companies
September 11, 2014
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There are plenty of terms that a new investor in the real estate market might be unfamiliar with. The topic of cash flow is easy to understand although long term appreciation is harder for some investors to grasp. Understanding what is capital appreciation in real estate is useful when evaluating the performance of an investment property in any growing housing market.

Standard Appreciation in Real Estate

Studies are conducted annually that try to determine the national average rate of appreciation for a property. There are many theories that are released about how much or how little homes gain in value each year. A capital appreciation is best described as an asset that is purchased at one fixed price point that rises in value over time. These values can be diluted by higher taxes and the rate of inflation depending on the economic climate in the U.S.

The average rate of appreciation on a national basis is currently around 0.2 percent when adjusted for inflation. This is a value that is determined when figuring in both investment property and homes that are owned as single family properties. Homes can and do grow in value in emerging housing markets based partly on supply and demand. New investors who try to speculate the growth rate of home appreciation can find it difficult to predict long-term rises.

Buy and Hold Investments

Real estate is a type of investment that will grow in size based on the amount of years it is held. There are few instances where people buy into a property and quickly make a sale to reap the rewards of a seller's market. In most cases in the U.S., buy and hold investing is one of the ways that wealth is built in the long term. Most analysts have released data that suggests the national average appreciation will remain between 3.3 percent and 5.7 percent over the next five years in the U.S. market.

A lower appreciation each year could be offset by taxation. Investors who are able to maximize deductions and reduce operating expenses can find that profits will rise. When evaluating an investment property, the cap rate as well as the term appreciation can be two of the factors that can judge the future success of the investment. Location is always a factor when judging a piece of real estate in the rental market.

Local Appreciation for Rentals

Because location is important, a theory known as local appreciation is now affecting national averages. Top producing rental markets like San Jose, Los Angeles, Miami, Jacksonville, Dallas and Detroit have increased in local appreciation over the past several years. A strong local economy mixed with millennial renters are some of the keys to rises in local appreciation. The Home Price Index data available from the Federal Housing Finance Agency can help investors to find out the top percentages in certain markets.

Purchasing and holding onto a one, two or three-bedroom rental homes is one of the keys to future investment growth. There are times when new investors can be tempted to sell based on decreased appreciation or high turnover of tenants. While all scenarios are different, the largest range of men and women in the U.S. who own rental real estate choose to hold onto the property for longer periods of time. JWB turnkey homes for sale positioned on this website do offer appreciation growth to investors.

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