The prudent real estate investor always considers several basic returns to determine the potential benefits of purchasing, holding on to, or selling an income property investment. We’ve already discussed the importance of cash flow, and now for this second part of our multi-part series on how an income property investment makes you money, we’ll look at appreciation.

2. Appreciation. Appreciation is the growth in value of a property over time. In other words, future selling price minus original purchase price equals appreciation. For example, let’s say you own a rental property investment worth $350,000 that you purchased for $250,000 in 2001. The amount of money your real estate investment appreciated over a time period of five years is $100,000 (350,000 - 250,000 = 100,000). Staightforward enough; but looking back from today doesn’t answer how much growth over how much time for a real estate investor trying to project appreciation on a real estate investment about to be purchased.

Let’s begin with a fundamental truth about real estate income property: real estate investors really are buying the income stream of a rental property. So it stands to reason the more income you can sell, the more you can expect your property to be worth. Likewise, the faster you can increase the income stream, the faster your property will most likely appreciate. In other words, follow the revenue. Determine the likelyhood of an increase and throw it into the decision making. Here are some things to consider.

1. Market conditions. Is there anything about the location that could change and make the property more attractive, and thus shift the balance of supply and demand?
2. Economic inflation. Will rising costs of new construction generally drive rents up?
3. Physical improvements. Does the property lend itself to improvements that might demand higher rents, attract and keep better tenants, or reduce vacancy losses?
4. Operating expenses and management. Are there wasteful expenditures you can readily minimize?

We’ll consider another way how an income property investment makes you money next time. So stay tuned. In the meantime you might want to preview a sample cash flow statement to see how you can project appreciation over a ten-year period on a property to see whether or not it meets your investment goal.

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