Six Factors that Cause Property Values to Increase In Value:
1. Inflation:
As we all know inflation is the decline of the buying power of money. We can also refer to it as the effect of the increase in the cost of living. As society becomes more modern and sophisticated, we generally develop a desire for things that cost more. So when you have a buyer purchase a high-end piece of real estate, you can count on that driving property values up. (Note: the same applies in the opposite direction. When a buyer purchases at a low end price, it's going to drive property values down. This is the case in the current market in certain geographic areas.)
Income property has some excellent potential for offsetting the effects of inflation. So even if you're not seeing an immediate return on your investment through the monthly cash-flow generated, hold your position for the long-term and you'll definitely make your investment worth-while.
Think of it this way, cash-flow may be tight at first but your tenants are paying the mortgage for you and your property is appreciating over the years. Let's not forget the fact that you can increase your rents yearly to stay in-line with the market rents. The longer you hold, the more cash-flow you'll begin to generate. Not to mention the fact that you might stumble upon a buyer willing to pay you $1.5 million for that $600,000 investment you made.
2. Improved Infrastructure:
Changes within the community can produce some very profitable results for the value of properties within the area. However, not every improvement can lead to a positive effect for the value of your property. Some projects might be publicly built and financed, like a local park. Others might be privately owned and financed. And each of these can lead to a different effect on the value of the properties in the immediate vicinity of the project. Some buyers may be signaled towards a great purchase, and others might be enticed to sell because of the new developments.
My suggestion: attend your local Neighborhood Council meetings and your Land Use Committee meetings. Be aware of any new developments in the community and alert yourself to the effects those developments might have. It's always best to be aware especially if you're considering buying or selling.
Examples:
- Long-term construction: the messy appearance of the neighborhood (road work, detours, dust, etc.) might weaken the market in your area. Values may or may not go down. If they don't stagger, you'll definitely see a slow appreciation rate during the development phase.
- New Roads: one street was once readily accessible but now because of the new roads it's not. You can count on property values deteriorating there.
- New Park: like the new Rio de Los Angeles State Park in Los Angeles, CA; or more specifically Cypress Park. A development like this adds value to the local community. The park leads to increased activity in the neighborhood and it attracts much attention from surrounding neighbors making the location enticing to prospective homeowners even if the price is slightly high.3. Economic Conversion:
Voluntary Economic Conversion: this occurs when there is a change in the current use of a property. And in this case, you have caused the change. For example, let's say that you purchased a Single-Family Residence and converted it into a professional office space. Either the area had zoning permits allowing it or you had the zoning changed. In this case you have engaged in a voluntary economic conversion.
Unlike buying a lot of land to hold for future use and development, economic conversion is the best immediate real estate investment. When an investor purchases a property for the purposes of engaging in a voluntary economic conversion, they are ready to act immediately on their new development. It being something new, it often brings added value to the community!
4. Increased Cash Flow:
Cash flow sets the cash on cash yield...meaning, the return on the actual cash that you have invested in the deal. And anything that will increase the cash flow of a property will also increase the property's value! (Note: we'll have a more in depth discussion on this topic later.)
5. Capital Improvements:
Capital improvements don't necessarily increase the value of a property overnight. (Just ask a reputable appraiser and he/she will tell you the same thing.) This is especially the case if the capital improvements are simply for the purposes of making up for poor maintenance.
So what kind of improvements will add to your property's value? Decorative landscaping is one such improvement.
A quick note for the avid investor: I always say "everything that you do should contribute to a strategy!" So when you buy a property, plan to make any capital improvements earlier on rather than waiting and doing it later. If you have to create a schedule of capital improvements to be made and create a budget, do it! You'll only benefit yourself in the short-term as well as in the long-run.
6. Supply and Demand:
We're currently in a Buyer's Market! There's a tremendous amount of inventory out in the market place due to foreclosures, high expense of ownership, etc. As an investor, this is where knowledge of the current market and an solid game plan come into effect.
You ask, "how do I benefit from the current market?" Well, let's take a look.
What is there a large supply of? Single family residence homes.
What is there a short supply of? Maybe nice office space.
Well, remember what we talked about earlier? Voluntary economic conversion! It's simple economics and yes ladies and gentlemen, it really does work. You CAN invest in a single family residence and convert it into nice, professional office space. But do you homework! You have to make sure that the local zoning regulations permit it.
Don't let the vast inventory trick you into thinking that anything you pick up is a great buy because it's undervalued and will appreciate quickly! Do your homework, create an investment strategy, and leverage your position as a buyer/investor. The foreclosure market is saturated. Some are good picks while others are not. Read my article on Foreclosures before you move forward in that direction.
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Ricardo Bueno - Your Residential & Commercial Investment Advisor
Ricardo Bueno is a Mortgage Advisor & Team Leader with Wilshire Financial, Inc. A diversified mortgage brokerage located in Pasadena, CA.
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