Spirepoint Properties

Forcing Property Appreciation

Most people invest in the stock market, either directly or indirectly through their mutual funds. How many times have you personally done something to increase the value of your stock investment? We're willing to bet never.

That's the nature of paper investments... someone else controls its value. Real estate is quite different because it's tangible - you can physically do something to increase the value of the property. Many homeowners have experienced this when they...

  • Landscape their yard
  • Paint the interior and exterior of the house
  • Update kitchens and bathrooms
  • Upgrade the flooring
Normally, it's very difficult to get back 100% of your investment into renovations of a property. For example, you own a home in a nice neighbourhood, and your house is worth $240k, but another one with a pool is worth $255k. So you decide to install a pool for $25k. Is your home now worth $265k? Probably not. In fact, it will probably be worth less!

Take a look at the following RE/MAX website. It shows which renovations provide the highest return on investment:

http://www.remax-oa.com/SmartRenovator/

Those returns are assuming a house is already in decent cosmetic shape. The return on investment can be MUCH higher (even greater than 100%) if the same renovations are done on run-down properties. Why is that the case? A price decrease is usually related more to emotional opinions of value rather than to the exact cost to bring a property up to the typical standards in a neighbourhood.

For example, a run-down looking property might be worth $40k less due to its appearance, but that value could be brought up to market by doing $10k - $15k of renovations. By buying run down properties that need cosmetic repair only, and investing a modest amount of money, you can in effect force the value of the property back to the general market pricing.

With multi-unit buildings, there's another way -- increasing the return on investment of the property. This is done by increasing the cashflow of the property through increased income or reduced expenses.

So if you can increase the rent by 10%, the cashflow will go up and the property value will usually go up. If you can decrease expenses by 20%, the cashflow will go up and the property value will also go up. Exactly how much the property value goes up depends on the market.

We use both of these methods where possible -- we buy cosmetically run-down property, and closely manage income and expenses to ensure the highest cashflow. This allows us to force appreciation upwards, making instant equity on the property, which in turn allows us to refinance the property and pull out money for another deal.


This article is copyright © 2004-2010 Spirepoint Properties. All rights reserved.

Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002.  They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.

Their FREE Millionaire Investors Club is dedicated to making each of its members a millionaire through investing in real estate. The club offers networking with investors across Canada, a subscription to the Spirepoint Insider e-newsletter, and much more.

Join the FREE Millionaire Investors Club today at www.spirepoint.ca