Appreciation and increased equity are two terms that you will frequently come across while searching for real estate information. Regardless of whether it is information on real estate in USA or local or national real estate these two terms are bound to crop up more than once. Many people tend to confuse these two terms. Let me explain these two terms in the context of real estate investing.
Equity is the difference between the market value of property and claims held against it. If you have a loan against a property, it is a claim against it. Your home equity is the difference between the market value and the outstanding amount on your loan. As you keep paying the installments your equity keeps on increasing.
While increased equity is the direct result of the payments you make on the mortgage, appreciation is something that happens on its own. You can expect appreciation only if you take the right decisions while buying property.
Appreciation is increase in price or value of properties. People normally talk about how the value of their house has appreciated. The fact is that houses do not appreciate, they actually depreciate in value. It is the land on which they are built that appreciates. You may be living in one of the hottest real estate in USA and still your house may not appreciate at all. There is also a strong possibility that the prime land may also not appreciate as fast as land prices in other locations. Land prices may already have reached their optimal price leaving little scope for future appreciation.
It costs the same to build a house on any location and depreciates at the same rate too. Maintaining value of a house requires constant repairs. Even if that is done on regular basis it is difficult to get a price that equals the initial cost plus maintenance cost unless the land price appreciates. There may be a case of price of lumber and other building materials going up but that doesn’t have a great impact on the value of buildings.
Understanding appreciation in this industry helps you broaden your outlook when you look at deals. A dilapidated run-down home in a good location is anytime better than a stately mansion in prime real estate. You get a better return on investment on the first as it costs less and there is ample scope of appreciation. On the other hand, it may be quite some time before you are able to find a suitable buyer for an expensive property you buy without considering the potential for appreciation.
Land price appreciates because of the demand and supply factor. While there is limited supply of land, population increases with every passing day. A home owner may sell his house cheap on consideration that it has not been well maintained. You, as a real estate investor should know better that it is the land it is sitting upon is what is more important.