Forced Appreciation is a strategy used in multifamily real estate investing to increase the value of a property over time through improvements and management. This can include renovating units, adding amenities, increasing rental rates and/or decreasing controllable expenses.
This strategy is uniquely attributed to real estate, especially commercial real estate, as I know of no other asset class that allows you to create the value that you wish to see in your investment. Try as hard as you may, you probably aren’t going to be able to impact the price of your Apple or Google stock portfolio in any meaningful way, so you’re largely at the mercy of the overall market and whether it’s having a good month or a bad month.
One of the most common ways to achieve forced appreciation is by making physical improvements to the property. This can include upgrading units, adding amenities, and making repairs. For example, an investor may purchase a property with older units and renovate them to include modern finishes and appliances. This can increase the rental income and attract higher-paying tenants, which in turn increases the value of the property.
Another way to achieve forced appreciation is of course by increasing rental income. This can be done by raising rent, filling vacancies, and finding ways to maximize the property's earning potential. For example, an investor may purchase a property with low occupancy and implement a marketing campaign to attract more tenants. This can increase the property's rental income, making it more valuable.
It may seem unlikely that any rents can be immediately raised upon purchasing a new property, but the reality is that it is quite realistic that a seller is just not interested in making the efforts to attract higher rents. I’ve experienced this myself with my single-family houses, where a good tenant has been there for years and I’ve just let them stay with very minimal rent increases. The market rent could be hundreds of dollars higher, but it’s easier for me to just let them stay and continue taking good care of the property so I can focus my attention elsewhere.
Finally, reducing expenses can also be a way to achieve forced appreciation. By streamlining costs or creating efficiencies, an investor can increase the property's net operating income (NOI), which can in turn increase its value. This can be achieved by reducing property management fees, reducing energy costs, or finding more cost-effective vendors, for example.
It's important to note that forced appreciation strategy is not a guaranteed way to increase the value of a property and also it's not a short-term strategy. It requires a long-term commitment, time and money. However, when executed correctly, it can result in significant increases in property value and cash flow.
In summary, forced appreciation is a strategy that investors can use to increase the value of a multifamily property over time. This can be achieved through making physical improvements, increasing rental income, and reducing expenses. By implementing these methods, investors can create a more valuable property and increase their return on investment, which is of course the overall name of the game.