When most investors start out, they run a few numbers and come up with an acceptable price, condition and location for an investment property. All of us do this. The next step is to set up an internet search that emails you when these properties come available. Piece of cake. Now all you have to do is just sit back and wait for good deals to come your way, right?
Wrong. The problem with armchair investing is that everyone else is doing the same thing. We all use the same numbers, come to the same conclusions and have access to the same software to do searches. In general, if it’s easy, more people will do it, which increases competition and drives down profitability.
Think about this in terms of jobs. Everyone is looking for that high paying job that doesn’t require much work. How likely are you find it? “Does it even exist?” is the more important question. A lot of the properties people want as investments also don’t exist.
Here’s why waiting for good deals to come your way is a bad idea: When you list a house for sale, realtors can look at how many people viewed the property online and how many saved it to their favorites. I can tell you from experience as a realtor that you will usually get thousands of views and emails sent out the first day a property hits the market.
If that property really is a good deal, everyone knows. Typically, investors following this strategy will rush over there and put in a bid the first day, hoping to beat everyone else. Guess what? Everyone else is doing this too. Sellers realize pretty quickly what’s happening and will wait until they get more bids before selling. It happens all the time. So how do you beat the competition? You learn to create good deals instead of waiting for them to come to you.
“Today I will do what others won’t, so tomorrow I can accomplish what others can’t.” – Jerry Rice
Ready to invest in rental property? BiggerPockets’s guide to the buy and hold strategy will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here’s how.
Forced appreciation is buying something that’s not a good investment and making it into a good investment. Arm chair investors are not looking for or bidding on these homes, which reduces competition and increases profitability. After giving you some of the ins and outs of this concept, I’ll end with a true story of friend of mine who only bought non-cash flow properties and made millions using forced appreciation.
Benefits of Forced Appreciation
- Less competition
- Increased cash flow and appreciation
Drawbacks of Forced Appreciation
- Requires specialized knowledge
- More time spent analyzing properties
- Typically a one time benefit
Forced appreciation can be adding resale value and/or increasing rents on a property.
A Few Ways to Increase Rental Income Through Forced Appreciation
- Create an additional room in a larger house
- People are usually willing to pay more for a three bedroom than a two bedroom, even if square footage is similar.
- Convert attic space to living space
- Convert basements to extra living space
- You can double the living square footage of some houses and significantly increase rents for the cost of carpet and drywall.
- Convert garages into living space
- People love garages, but renters will pay more for extra living space.
- Build a mother-in-law unit or studio in the backyard to rent out. This can significantly increase cash flow because you already own the land.
- Use Airbnb instead of simply renting to bring in more monthly income. Airbnb will show you how often a property has been rented so you can run an analysis.
A Few Ways to Increase Property Value Through Forced Appreciation
- Add bathrooms
- Most people are looking for more than one full bathroom now. It’s not always profitable, so see what people are willing to pay for in your area.
- Add bedrooms
- Properties are valued based on similar properties. Adding bedrooms can change the comparables and increase the price of the home. Drywall is cheap.
- Add curb appeal
- Most people rent and buy using emotion; first impressions matter.
- Rehab a cheap duplex while living there and then increase rents. Multifamily properties are valued based on the income they generate. Not only will you increase rental income, but also property value.
Related: Investing for Cash Flow or Appreciation – What’s the Difference?
Learning what works in your area takes a lot of boring analysis. But once you figure it out, you’ll be able to easily repeat the process or move on to finding other ways to force appreciate properties. Very few people do this and miss out on great opportunities.
Here’s the story you’ve been waiting for. I know an investor who would almost exclusively buy large three bedroom homes that had no chance of cash flow. She would then create two more bedrooms (moving walls or converting garages) and one more bathroom within the house. At an average price of $500 a room (college students) in our area, she was able to turn a break-even house into $1,000 a month cash flow with no competition. She has been buying at least one home a year for over 20 years just on the income from forced appreciation.
“If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.” – Albert Einstein
If you can master forced appreciation in your area, you will be your only competition. Every property will become a potential investment.
Investors: Have you forced appreciation in your properties?
Leave your stories and tips below!