In the real estate investment industry, appreciation refers to the increase in the value of a property over time. This can occur for a variety of reasons, such as general inflation, increased demand, improvements to the property, or changes to the area around the property that make it more desirable.
There are two types of appreciation in real estate:
- Natural Appreciation: This is an appreciation in property value due to factors like inflation, increased demand, or changes in the local real estate market.
- Forced Appreciation: This type of appreciation occurs when the property owner makes improvements to the property that increases its market value, such as renovations or additions.
Appreciation is considered a key component of the total return on a real estate investment, along with cash flow from rental income and the benefits of any tax deductions. However, it’s important to note that appreciation is generally realized only when the property is sold or refinanced. Until that point, it is largely an unrealized gain.