How Forced Appreciation Works

[Michael Vazza]

Let's say you buy were to buy a property for $1,000,000 at a 5% cap rate which happens to be the market cap rate as well. Through $200k of renovations and improvements, you are able to increase rent resulting in the NOI to increase to $78k. That makes your stabilized yield (the total cost of $1,200,000 divided by the new NOI of $78k) = 6.5%. You've now forced 150 basis points of appreciation, which you can now regain on the sale. If you were to sell at the market cap rate of 5%, assuming the market hasn't changed, the value would be $1,560,000 = a $360,000 profit. Essentially the value-add "forces" appreciation, allowing you to beat the market cap rate and sell for a profit.