How do you determine the appreciation of a Investment Property?

[BlairClarke]

So im wondering just how you would determine what the Annual Appreciation would be on a property?



I hear people saying "a modest 3%" annual return but how did they get this.



Im new to all of this so bear with me im still learning!

 

[bizaro86]

It's predicting the future, so there is no way to precisely determine it. The long term appreciation rates are usually about the same as inflation, but it varies by area, which is hard to predict, since you'd need to predict the economic future of an area.



Regards,



Michael

 

[JoeRagona]

Hi, when people say 'a modest 3%' it's just assuming the market will move in that direction because based on all historical appreciation, the 'average' is about 5%. Now keep in mind that 'average' means nothing when you are talking about specific investment properties in certain areas. If you talk to most people, they will agree that 3% is a very conservative appreciation to use because if you start using 5,6 and 8%, right away you will be dismissed because most follow the average 'national' numbers in the media and what they hear and read they believe true.



Does that help you?

 

[invst4profit]

Annual appreciation can be estimated through comparables available through your real estate agent. This should give a close idea but keep in mind this is a look in the rear view mirror. There is no Cristal ball to see the future.

When you read statements of anticipated appreciation it is simply wishful thinking, or a sales pitch, based on past performance. It may come true or not depending on both known and unknown variables.



It's investors, or speculators, being optimistic.

 

[Brigham]

Yes I do agree that the annual appreciation may never be accurate all the time,It may vary and there should be some big differences too.The real estate agents have some knowledge about it and it is totally assuming.

 

[Thomas Beyer]

[quote user=BlairClarke]

I hear people saying "a modest 3%" annual return but how did they get this.


Experience, facts, 50+ year history, CMHC stats, Royal Bank stats, Government of Canada stats, real estate board stats, landlord association stats ..



In Canada real estate doubles every 15-20 years .. was faster the last 10 .. but likely slower going forward .. 5% is prudent in economically strong regions where people move to ..



3% is quite conservative .. and AB and SK will be higher I'd say if oil stays over $80/barrel and natural gas prices continues to strenghten .. (and likely ON with a new conservative provincial government) and no major China-US trade war breaks out .. and no major country defaults on their debt (I mean besides Greece, Iceland, Ireland, ...)



It is an AVERAGE .. over perhaps 10 years .. as prices do decline and have declined from 2008 to 2010 in many cities .. and rising strongly in some since mid 2010 or flat in others or still falling in yet others !

 

[housingrental]

Something for thought



True sales history of a detached house in booming part of a booming city - Waterloo, Ontario....



Sold price 1989 - $140,000

Sold price 2005 - $172,000



Between the time new windows, sliders, furnace, other upgrades were done - likely apx. $10,000 was spent.......



It is entirely possible - even with gdp growth, population growth, inflation, infrastructure improvements, etc.. - for houses to lose value, or appreciate little, over long periods of time



And when population growth isn't strong (check some Detroit's sales history) ... and where there isn't material restriction's on new construction (environmental etc..) or other barriers to increased supply (development fees, etc..) valuations don't jump as easily on shifts in demand.



There is NOTHING guaranteeing prices will be materially higher in any shorter time period - three years, five years, ten years etc... - and a prudent investor should prepare for this on initial purchase - ie ensure cash flow offers sufficient return to justify ownership AND there is a margin of safety on operating income.....



Markets go up and down - and it's important to remember they OFTEN OVERSHOOT in both directions....



Did I miss something or does almost everyone who posts here seem to think that prices always go up a lot?

 

[Rickson9]

I agree with housingrental.

 

[Thomas Beyer]

Markets .. on average .. go up with inflation .. more in stronger markets or with declining interest rates ..



even in the US, in most markets, despite a SEVERE COLLAPSE of up to 50% in some markets .. most house prices are still well above the prices in 2000 ! [ indeed, not in Detroit .. an ex-migration city]



Of course markets ca go sideways for a while or fall .. such as 2008-2010 in many Canadian markets due to financial crisis ... or in the early 80's in Alberta after the NEP was introduced ..



House prices do go up .. as do prices for beef or barley or grain or beer or oil or gold .. always always always .. as long as we have democracies with elected officials that spend more money than comes in ... inflation is erosion of the value of money .. thus real assets appreciate vs. money ..



Of course, you should have sufficient cash-flow to survive those downturn years .. and should be able to hold long enough . 5 years .. better 10 or more !



Show me a healthy city on this planet where real estate today is cheaper than in the 80's or 70's or 19060's .. any ? anywhere ?

 

[MonteDobson]

[quote user=housingrental]Something for thought



True sales history of a detached house in booming part of a booming city - Waterloo, Ontario....



Sold price 1989 - $140,000

Sold price 2005 - $172,000



Between the time new windows, sliders, furnace, other upgrades were done - likely apx. $10,000 was spent.......



And during that same 16 yr period, the mortgage was paid down to ~$56,000 (assuming 20% down, 5% interest rate, 25 yr amort).



So with an initial investment of $28,000 in 1989, this detached house in Waterloo now has $116,000 in equity in 2005 (my calculations show a 9.29% compounded rate of return, excluding cashflow and repairs/maintenance/upgrades).



Point is, properties don't have to scream upwards to make money in real estate. Buy for cashflow, build up solid reserves, let the tenants paydown your mortgage, and you're good to go.

 

[invst4profit]

I agree that housing values do not always go up and considering the fact that rental property value is often tied directly to rental income that can be a issue in rent controled Ontario.

Based on consistant book keeping practices you may find that appreciation is eaten up by expences over the long term.

The fact that values may only go up equal to inflation also means your increased operating costs due to inflation eats into your appreciated value if rents do not keep pace.



Equity in your property through tenant pay down of the mortgage may be a bonus depending on the market at time of sale, espically in a unplanned sale,but may be severly eaten away by a down market and real estate/legal fees.

Remember that money you use to pay down the mortgage (principal) is already your money earned through your investment of money and time put into the property. When you sell you are only getting back what you have already earned.



Always make purchase decissions based primarily on rental income/positive cash flow and with a consistant history and morgtage paydown you should be happy provided you hold loooong term.



Remember you are primarily entering into a income rental property business not a business based on speculating on appreciation.

 

[Thomas Beyer]

[quote user=invst4profit]

Remember you are primarily entering into a income rental property business not a business based on speculating on appreciation.


Are you ?



I'd argue if no appreciation is expected then real estate is NOT a great asset class to be in !



It's like buying stocks only for their dividend income .. or gold because it looks pretty !



Of course you buy investment assets because you have an expectation .. AND HISTORIC EVIDENCE .. that is goes UP over time !! [not in a straight line, of course .. and it may drop too for a while ... but stocks today too are higher than 1980 .. and even in a lousy economy the Dow Jones or TSX index will be higher 2020 or 2030 !!]

 

[housingrental]

More items for thought.....



1) At current rent to purchase price the vast, vast majority of SFH's in the vast, vast majority of markets are net income negative when leveraged and when properly accounting for long term expenses.... so where is the return to come from for a current purchase of SFH if not through appreciation? the supposed apx. 9% IRR from one of the above poster would've been extremely unlikely to have been obtained when accounting for:



Vacancy

Ltb and small claims court costs

Uncollected rent

Property management fees

Providing any sort of reasonable value on property owner's time to administer

Repairs and improvements.... yes windows etc.... likely would've eaten up over $10,000 of this but if rented over that time period you can count on tens of thousands of more costs in painting, flooring, cleaning, landscapping, etc..



And then deduct lawyers fees, land transfer tax, and realtor's fee's at time of sale. It's very likely that at best after a 16 year hold the result would be a LOWER return than bonds could have provided for NO WORK and NO RISK and MUCH BETTER LIQUIDITY. And this was in a town with population growth, employment growth, income growth, significant development restrictions etc.. MANY MANY AREA'S in Canada performed worse...





2) The major drivers of the market over the last apx. 10 years - easier financing, lower interest rates, cultural shift boosting real estate demand - have all peaked and risk pushing in the other direction moving forward.



3) In case missed by other readers the assumption inherent in many of Thomas's posts are that it is a given that an investor is choosing a town that will perform well. I question this assumption. It is very easy to look after that fact and say "ohh well obviously I wouldn't have invested in city X"...... knowing in advance how things will play out is much, much tougher....... There are many recent examples of this from REIN members in Alberta and BC in certain markets that seemed like they had a lot going for them - good investment climate, job growth, capital improvements, etc... - I think it'd be good for an investor to ask this of themselves before pulling the trigger:



If I'm so certain city X is a great place to by rental properties what cities in Ontario (etc..) are less desirable to invest in and why?



Then work through asking - do any of those same risk factors might apply to city X in the future?



4) Post below

 

[housingrental]

4) The above posts have data selection issues that can distort an analysis.



For example where Thomas has written:





"ven in the US, in most markets, despite a SEVERE COLLAPSE of up to 50%
in some markets .. most house prices are still well above the prices in
2000 ! [ indeed, not in Detroit .. an ex-migration city]"



To be clear one should take away that:



A) Certain markets in the USA are lower than they were 10 years ago



B) Markets that are currently higher than they were 10 years ago may or might not be lower when looking at other ten year periods in the future. IE a market that has dropped 50% in the last few years might well be lower over a ten year period - say from 2006 to 2016..... So if you look in 2016 - though not known yet - it is very likely that MANY markets will be lower over a 10 year period... very possible in certain markets (Miami, Phoenix, etc...) that over a 20 year period they might still be lower... ie 2006 to 2026......



Saying certain markets are higher from 2001 to 2011 does not help you much if you did not purchase in 2001 or happened to purchase in 2001 in a market that is currently lower



Another example that Thomas has wrote above and my critique of it:



"Of course you buy investment assets because you have an expectation ..
AND HISTORIC EVIDENCE .. that is goes UP over time !! [not in a straight
line, of course .. and it may drop too for a while ... but stocks today
too are higher than 1980 .. and even in a lousy economy the Dow Jones
or TSX index will be higher 2020 or 2030 !!]"





What if you happened to purchase the investment assets at the wrong time? For example someone who purchased either:



a) A company that has done poorly



or



B) Market focused ETF - Say Nasdaq pre crash





11 year return? Apx. -50%........



So with wrong timing, or wrong selection, even with INFLATION, POPULATION GROWTH, GDP GROWTH stocks (ie business's) or real estate can be unprofitable even when held for 10+ year periods

 

[Rickson9]

Adam is right even though his opinion is not popular.

 

[MonteDobson]

[quote user=housingrental]

MANY MANY AREA'S in Canada performed worse...



And MANY MANY AREA'S in Canada performed better...

 

[housingrental]

Thank you for the kind thoughts Rickson

I appreciate your avatar, it is very warming

[quote user=Rickson9]Adam is right even though his opinion is not popular.

 

[housingrental]

Hi Monte

You are correct. I agree.

Adam

[quote user=MonteDobson][quote user=housingrental]

MANY MANY AREA'S in Canada performed worse...



And MANY MANY AREA'S in Canada performed better...

 

[Lucas]

There is truth to Adam's posts and opinions when considering property appreciation from an analytical perspective. The original post is asking for that perspective and I am not attempting to hi-jack the thread from its original question.



However I'd like to address the general foreboding flavour of his comment and offer what is in my opinion, a more realistic view of investing in Real Estate...



If you are going to be successful at investing in Real Estate one of the fundamental rules is to do your best to purchase the asset BELOW the market value. As well, as we all know, success in Real Estate is more than just asset appreciation. If properly executed, their should be monthly profit (i.e. Cashflow) extracted out of the property, as well as conservative leverage resulting in a "paydown" of the financing (aka mortgage paydown).



As well, if you are a savvy purchaser, you may be able to improve the asset (i.e. renovate) and create a more favorable spread between what you paid for the property (including renovation costs) and what the property is worth.



To try to answer your original question, before you consider the market appreciation (3% sounds fine in my opinion, depending on what city/geographical area you are considering), the above points should be your paramount concern. If you are looking to raise capital then getting a handle on the historical appreciation is important as well as having a good relationship with the Real Estate professionals that KNOW your market (i.e. Realtors, local investors, Appraisers etc...) and base your projections on KNOWLEDGE of the market and not a random number that you heard was acceptable.



Hopefully that helps,



Lucas Fausak

Realtor, Remax Excellence

780.965.7029

 

[invst4profit]

Ideally your points are correct Lucas however this assumes investors have the skills and abilities to achieve the points you mention.

Unfortunately most novice investors, even with the assistance of REIN, are not capable of managing there business as you have outlined which places into question how realistic it actually is to invest in real estate for appreciation. The vast majority of new businesses fail in the first 5 years which falls far short of what is required to benefit from appreciation.How many failures are there compared to successes. How many vastly underestimate expenses resulting in negative cash flow or fail to even consider the consequences of "bad tenants". All too many exit this business far before they can enjoy the benefits of appreciation. Unfortunately few if any advertise there failed attempts to enter into this risky business.



Real world I believe Adams statements are more realistic in regards to this topic.