Forced appreciation

[Nikolas Buchholtz]

Hey everyone, so I have made a few posts now and here is my next question. I am most interested in buy and hold investments, I have done enough research and reading to get the concepts of it and the term I have heard over and over again is "forced appreciation" which I read is used at purchase price, typically a 10 percent forced appreciation if I remember correctly, my question is how do you determine what 10 percent is and how much money is required to do that relative to purchase price of home or purchase price of the "forced appreciation". The next question is tied to the first when you do finally force appreciate the property what should be looked at first or appreciated as a rule of thumb? Thanks everyone

[Miguel "Mike" Perez]

10% forced appreciation simply means you make improvements so the property appraises 10% higher if you were going to sell it in the retail market.

This can be done many different ways but primarily it is done by rehabbing the property. Out with the old and in with the new on everything that needs to be replaced to make it seem like it was installed within the last year. Notice I said 'seem'. If flooring and walls can be refinished to make them seen new, then no need to replace them entirely. This applies to every corner of the lot so don't ignore the exterior because your potential buyer won't.

How do you know how much to spend on rehabbing to increase it by 10%?

That depends on your market, but in general it means replacing countertops, updating cabinets, and replacing fixtures and appliances to what retail buyers (middle class and first time home buyers working with agents) would be impressed with and would be willing to pay more money for.

Many times it involves making modifications to a floor plan to tweak it so that it is more appealing to retail buyers. Today most buyers are looking for a modern open floor plan. If you have a property that is divided into individual rooms without line of sight into any other room, you will want to change that. You don't need to tear down the place, but you will want to open up a wall and put a breakfast bar between two rooms (living room and kitchen) if it makes sense. Consider taking out an entire wall as long as you do it right and not compromise the structure.

Keep in mind that 10% is just a baseline and a very basic one. Many investors are looking to force appreciation by much more than 10%.

For multi families 2-4, it is similar but focuses updating units with what modern retail renters are looking for. Your NOI will increase and your property will appraise for higher.

However, a word of caution based on my experience.

In multifamily buildings, my experience has been that updating units doesn't have as deep impact on appraisals which are based on comparable sales.

They do make a difference but it seems to me that a single family property gets more bang for buck for improvements in the retail market from an appraiser's point of view. As an investor I give it a lot more value than what I have seen appraisers give it, probably because I see it as being able to command higher rent. I'm not an appraiser, but that's been my experience looking at the appraisals that have come back to me over the last year.

For commercial properties (5+ units, or office spaces) it's based on net operating income (NOI). You can do do this two ways. Increase income by raising rents, or reduce expenses by cutting costs.

You can increase rents on a whim but will your tenants stay and will you attract new tenants if you have high rents and outdated units? Not sustainably. So you can update your units and command more rent.

You can also install more efficient systems, mechanical and employee-based, but those also cost some up-front investment.

The higher your NOI is the higher the value of your commercial property.

Does that help answer your question?