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What Makes Property Value Increase Over Time?

When it comes to property management and real estate investing, you want to make sure you have a sound investment.

We recently talked about how you can determine if a particular property will make a good investment but mostly touched on financial calculations you can make. What also matters is the economics behind the property, specifically the property value.

What Makes Property Value Increase?

Property value is essential in determining if a particular investment is a wise decision, and understanding how property value is influenced will help you make this determination. Here are several main factors that affect housing prices in a particular area.

Size and Usable Space of Your Home

All homes are judged compared to all other homes like them in a given area. Thus, determining property value depends mainly on how well a home stacks up compared to other, similar homes in the neighborhood.

For example, a 3/1 is at a disadvantage on a street full of 3/2 homes. A 4/2 with a big, fenced-in backyard has advantages over a 4/2 on a small lot with a small or nonexistent yard. A 3/2 with a renovated interior is viewed as better than a 3/2 (or even a 4/2) with a sub-par interior.

Performing a comparative market analysis of a given property will help you make this evaluation.

Infrastructure Development

Outside of the home, property values are partially determined by economic opportunities available in the surrounding area. In urban or suburban environments, this means commercial businesses.

A neighborhood that is close to a thriving downtown entertainment district, for example, will enjoy a boost in the value of its homes compared to a community that is isolated. This is also why you see property values go up shortly after a major business moves nearby. Economic development in an area drives up property value for various reasons.

School Districts

If you’ve tried to buy a home in an area that has a high-performing school district, you know exactly how much a good school can drive up property values. Families who have the freedom to choose their neighborhoods do so based on school districts above any other single factor.

That single factor alone is what drives up property values for certain suburbs in any given city; their schools are thought to be superior to other local schools, which is why families who can afford to live outside of the city often choose to do so.

Location

Finally, one major factor is how close the area is to the urban core. Generally speaking, the closer the home is to the city, the more expensive per square foot. Note that this only applies to areas outside the city limits; certain city homes are often cheaper than homes in the immediate suburbs.

But it’s also why you can get more homes for your money in remote stretches of surrounding areas, compared to comparable homes. You’re trading convenience for size and per-square-foot cost.

Supply and Demand

Supply and demand are critical in all economies and real estate is no different. Home values are sure to skyrocket when the supply is limited and the demand is high.

Dealing with limited supply typically means there are fewer sellers than buyers in the market. Alternatively, a limited supply could also be the result of a shortage of skilled labor and building materials.

Upgrade and Updates

It’s not uncommon to find two homes that are similar in layout, size, and age to have different home values. The reason behind this difference is due to upgrades and updates within the home.

Some of the most strategic upgrades and updates you can do to your home to boost its value include:

  • Paint updates
  • Minor fixture replacements
  • New systems
  • Replacing appliances
  • Deck addition
  • Minor kitchen remodel
  • Landscaping

Interest Rates

The prices of homes increase as mortgage rates fall because it becomes more affordable for first-time home buyers to enter the market. Similarly, those that already own a home will be incentivized to upgrade their home, either in size, amenities, or both, when interest rates are lower.

A Healthy Economy

Economic growth will also ultimately grow property values. Some of the attributes of a healthy economy include:

  • Minimum wage increases
  • Consumer confidence
  • Employment rates increase

In the same way a healthy economy drives the real estate market, a health real estate market also helps stimulate the economy.

Disasters

When disasters occur, whether they be natural or man-made, homes in unaffected areas will increase in value as a result of increased demand and decreased supply. Specifically, homes in regions immediately surrounding affected areas of a disaster will see significant increases in property value.

Implications for Investment

The age-old saying, “location, location, location,” takes on a whole new meaning once you understand the true impact of total appreciation. Beyond the physical factors of a home, you should also look into implications for investment which include:

Future Development

Again, it’s important to take a look at the future development that is scheduled to take place in an area. Not only are the amenities of today important for your home, but also pay attention to what’s to come soon.

While most developments will increase property values, there are instances it can actually decrease property value as well. For example, increased supply due to the addition of condo complexes could drive down the prices in the area for single-family homes.

Average Age

Take a look at the average age of the neighbors in a particular area to get a hint of the appreciation value of a home. As we previously mentioned, schools in an area will impact homes with younger children.

Similarly, though, those with children are likely to steer away from neighborhoods with higher average ages of homeowners because they won’t have a playmate for their children.

Land Values

The location of a home within a particular neighborhood is critical because not all homes and lots are created equal. For example, homes located nearby busy streets are going to be less desirable than those nestled in a cul-de-sac.

Most neighborhoods will evolve their own demographic, cultural, and social characteristics that directly impact the land values of the homes in that area.

Bottom Line

When investing in real estate it’s important to look into what makes property value increase beyond the physical attributes of a home. Instead, look into homes that will provide the most opportunity rather than those with all the shiny bells and whistles today.

Final Thoughts

If you are wondering what makes property value increase, hopefully now you understand that there are multiple factors that affect housing prices. When it comes to investing, not only do you need to look at what will increase property value but you’ll also need to pay attention to the implications for investment as well.


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