I have to confess to you here and now that I am a numbers guy…when it comes to investment property. I like to know what the returns will be, how profitable it will be (if at all) and exactly what my money will be doing here rather than there. And that, in turn, is how I counsel my investment property clients. You see, to me, owning rental property is all about the returns. And with appreciation being one of the 4 benefits to owning investment property I thought I would discuss it here.
One of the most popular questions I get is “what is the rate of appreciation for this property?” My standard answer is “I have no idea.” Keep in mind that even the most educated real estate agent on earth cannot tell you what appreciation will be. He can tell you what it was. He can give you a historical perspective. But that’s it. Anyone who tells you any differently is guessing, at best.
Here in Kansas City the average historical appreciation is right at 5% per year. The Bulls Eye, if you will. Take any 10 year period and that’s about what it will average out to. But some years it has been 10%. Some years 2%.
So when I’m figuring returns for my investor clients I will always use 5% or less. Recently, because of the flat to moderate growth we’ve been getting here in the KC area, I’ve been using 3% to 4%. I also put a big asterisk next to the number saying “Best Guess”. I want people to know I cannot forecast something like that. Heck, if two more planes tragically fly into New York high rises anytime soon I would say 4% would be a dream. (Get my point? I cannot see what will happen next month, or the month after.)
In my opinion, an investment property should make sense at 0% growth for the first year. You should know pretty accurately what your rates of return will be BEFORE you purchase and that is without appreciation.
And one last thing to keep in mind. Income property will appreciate, by in large, separately from regular housing. Emotions and demand drive housing to appreciate quicker than it should. But with rental property the demand will drive it to some degree but appreciation can be tied very closely to rent rates.
We just exited a period of time when everyone and their brother could get a loan under almost any circumstances. Rents fell slightly or in a best case scenario held steady. Rent incentives were common. But now that mortgages have gotten a little more difficult to obtain and foreclosures are up rents have firmed and are even starting to rise while housing appreciation is very flat.
It’s not an exact science. That is why it’s important to be in tune with your particular criteria. Or work with someone who is.