Forced appreciation: What does it really mean?

Question

Hi everyone, I wrote this email to Brandon Turner and got an auto message back so I thought I would copy and paste to the group and see if I could get any help:

Here's the message I sent:

I am really getting interested in real estate! I have 4 SFR's (which I had no clue that were really investments until a couple of weeks ago). Oddly, it was just something that our financial advisor said would be something we should do about 12 years ago and we just have continued to add to our SFR's as we want to ever since. Until I found BP and the Pro account through one of your webinars, I never knew there were numbers that actually calculate a good deal. It's just amazing that we went this long and had no clue what we had.

ANYWAY - I am reading the article that you wrote on "7 Years to 7 Figures" and am trying to figure out how and what forced appreciate is. When I search the words in BP I can't find anything and wondered how to get 10% in the first year. If you are looking for podcasts or webinars to do, or just a simple email back to me about this, I would really appreciate it.-Katie

-Katie

Frank Wong · Answer

Instead of laminate put down luxury vinyl planks. It looks the same but is water proof. Tenants will spill water and not care. I’m always a fan of changing the floors. Done right it always adds value.

Frank Wong · Answer

Hello Katie,

An important thing to know about Force Appreciation. You have to make sure the market place has comparable sales that have closed to support your renovations and improvements. What do I mean?

Example. The wrong way. Oh Great! Let's renovate the kitchen new granite new baths new floors. My property will be worth so much more. Doesn't work exactly like this. You want to make sure your renovations don't cost more than what the ARV (After Repair Value) is.

Say there are comps in the area of renovated homes that have sold for $200k. Those houses have updated kitchens baths and floors. Your house is all original and needs those updates. You purchased a house for 110k. The renovations will cost you $45k to do those updates. Now your $110k house + $45k is now worth $200k and your cost to do this is $155k. You made $45k in force appreciation.

Katie Lea · Answer

@Frank Wong, thanks for that idea! I wonder how much more it is, but when you consider wear and tear, it may be a better cost in the long run. We just had someone mess up the floors and it would be hard to replace all of it in a bedroom. I know that is sort of what the deposit is for, but when rents are lower, the deposit doesn't help much. Anyway, thanks for the suggestion, definitely something to think about!

Timothy Lewman · Answer

@Katie Lea in addition to the other comments, you can also force appreciation by increasing sq ft by an addition or finishing a basement/ attic. Within the existing foot print, can you add a bathroom or another bedroom? Can you build a garage?- if one doesn't already exist. Can you add a deck or patio?

Numbers dont lie; if comps with these extras are selling for more, you'll have to run numbers and decide if the cost will pay off.

Katie Lea · Answer

Thanks @Frank Wong I really appreciate this! Great example and really helpful. Quick question. In the properties that I have I put down all new laminate on each one because I don’t want to deal with carpet and buying new carpet every 3-5 years. I don’t know if it forces value but I do it because of the upkeep. Do you think something like that helps - not even for the forced appreciation but rather just upkeep.

Katie Lea · Answer

@Theresa Harris, thanks! That's kind of what I thought, but just wanted to make sure.

Theresa Harris · Answer

Normal appreciation occurs when your property is worth more because the market goes up. Forced appreciation is when you put money into the house to increase the value. For example, you bought a place with an older kitchen. You put in a new kitchen thereby increasing the house's value. You won't always get your money back and some renos are mover valuable than others.

Forced appreciation: What does it really mean?

Forced appreciation: What does it really mean?

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