What is Appreciation?

Question

While attending this weekends fantastic San Francisco Real Estate Networking Summit with nearly 200 investors from the BP (unofficial event), there was the usual discussion about APPRECIATION.

After listing to some of my colleagues give their midwestern take on the concept, and understanding the general feeling about the subject on the BP...it dawned on me.....

We throw around this word of Appreciation mostly as a noun.

In certain markets, mostly coastal areas, Appreciation is the expectation of the increase in value of a property.  Ask some friends and fellow investors involved in the early 2000s about their thoughts on appreciation.  Those with the best upward increases in value were usually the hardest hit during the recession.

At the Summit, I made the comment that APPRECIATION is a verb.  I stand corrected, only APPRECIATE is a verb.  But I believe that an investor should Appreciate their investment.  Most of us are in the business of investing to make money, but at the same time, you need to enjoy what you are doing to really be successful.  You need to appreciate it.

The next time that you think that your goal is Appreciation (n), consider those from early 2000s that lost so much.  Its really a gamble and without a crystal ball, no one knows for sure when that will come to a halt....or ask two economist for their opinion.

At the end of the day, to appreciate is an achievable goal and appreciation is a hope and a gamble.  Investing is about calculated risk taking.  Consider what "game" you want to play the next time you go to Las Vegas.

So, back to my friends and colleagues from the midwest, who regularly get asked the question about appreciation, as do I....ask the investor if they mean Appreciation or Appreciate.  One is an enjoyment (and cashflow) and the other is just a gamble.  What are Your stakes?

Account Closed · Answer

Danger! Danger! Will Robinson.  A rate is merely a measure of change. Appreciation rates are JUST like rent rates, vacancy rates, collection rates, expense rates, etc.  Just because you do not understand them DOES NOT make them mystical icing on the cake bullshit.

Seriously, to then look at appreciation rates over ONLY the last 14 years and make dramatic unsupported proclamations of appreciation lost is ignorant.  Vegas is considered by many as ground zero of the real estate bubble.  It was an area of high appreciation for a nano second.  Areas of consistent high appreciation,  SF Bay, Hawaii barely saw a drop in value and responded quickly.

Didn't you learn anything at the Summit?

William Robison · Answer

Hello Bob,

Gee, thanks for the constructive criticism.  Others insights are always extremely helpful to all.  You are correct, SF, and HI rarely see hits to appreciation.  I'm sure it will never happen, but what would happen if software engineering went offshore?  SF would crash...immediately.  But I do not have a crystal ball.

The best part of real estate investing is that there is more than one way to earn a nickel.  What ways each person chooses is what benefits them the most.  If appreciation were always the big investment play, then why are there any investors on Wall Street that play anything but the small cap tech?  Some want security I guess.

Im sure by the likes of your suggestions that it would never be wise to have money in an annuity or bond as well, even well after retirement.

Nevertheless.  Im a Missourian, wearing a plaid shirt and cowboy boots.  I think differently than others.  Call us old school, but some of the largest real estate investment providers are located right here in the sleepy midwest, where we concentrate on cashflow from boring, yet stable investments.  I, along with my friends at MemphisInvest, InvestIndy and the like will continue to plug away with our clients that often outnumber the amount of opportunities that we have available.

As for what I learned at the SFSU ReMeetup....well, a lot.  There were quite a few brilliant minds working there, and not all of them were working on grand slam bay area deals.  But prior to my time in SFSU, I learned that real estate has economic swings that are largely more than a 14 year history.  You see, America is more than a couple hundred years old, and the history of real estate economics generally indicates that the swings occur over a cycle of often more than 14 years.  See Chart

Diversification helps prevent risk perspiration.

I wish you much continued success with your investments!

Jonna Weber · Answer

@William Robison That struck a cord with me when you said that!  And as Brandon stated, any price appreciation is just icing on the cake.  Great job on the panel at the Summit!