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Real Estate Investment Software Blog

Every real estate investor hopes to see a good cash flow from his or her income property because that means the investment is providing some spendable cash each year.

But an income property’s revenue also plays a significant role in the value of the property, otherwise known as the appreciation of the property. Not to be confused with the wheel barrel full of money you hoped to deposit into your children’s college account, appreciation is defined as the growth in value of an investment property over time.

The formula is straightforward:

Future Resale price
less Original Purchase Price
= Appreciation

Okay, but with that said, it’s important to understand that with any real estate investment property, revenue—particularly net revenue (after operating expenses)—drives the value of rental income property. In other words, the more revenue, the more income stream you have to sell and thus, the more likely someone will pay you more for the rental income property than you did.

For example, let’s assume that you purchased a rental income property that generated a net operating income of $50,000 for $500,000, or at a cap rate of 10.0%. And then, over the course of the past several years, you increased rents and in turn increased the net operating income to $60,000. It’s probably safe to say that the property can be sold using the same cap rate of 10.0% for $600,000, in turn meaning that the property appreciated $100,000.

You won’t get to enjoy the benefit of appreciation until you sell, of course, but once you do sell, the benefit you derive from the appreciation can be substantial. In the meantime, you get the benefit of the higher revenue. So, it’s a win-win.