Most people know about appreciation through real estate and related financial products. What they don’t know, however, is that anything of value or asset, in general, can appreciate overtime. Even if you are considering things that depreciate by default such as cars; an unforeseen economic condition can cause supply chain instability which might result in the appreciation of some cars.
The term appreciation refers to the increase in the value of assets over time. Think of buying a rare car now and selling later for more money. Even if you did not do anything to the car such as remodel the car, its value would have gone higher over time. This increase in value is referred to as appreciation.
Investors prefer assets that appreciate such as real estate and land to maximize their return on investments. Other investors buy appreciating assets to hedge against inflation and other economic instability.
What is appreciation?
What is appreciation in real estate? Appreciation is a term used when the value of a property or an asset increases over time, according to Mashvisor. Let’s say that you buy a house for $200,000 and sold it for $300,000 ten years later.
You can clearly see that the value of your house has increased by $100,000 or 50%. This value is your appreciation value. There are two types of appreciation. The first type is forced appreciation and the second type is natural appreciation.
Forced appreciation
A forced appreciation is a short-term increase in the value of a property due to renovations or rehabilitation. For example, you can buy a two bedrooms house and turn it into 3 bedrooms house by doing some renovations. Assuming that you bought the house for $100,000 and used $30,000 for renovations; your total cost of the house is $130,000.
After this renovation, you can market your property for $150,000. The difference between the total cost of the house and the new value of your house will be your appreciation value. If your house is sold at $150,000, you would have increased the value of your house by $50,000.
Natural Appreciation
Natural appreciation happens slowly as the name suggests. You do not do anything to your property at all. Instead, you buy it and hold it for a while. Over a period of time, the value of the property will increase based on the market conditions.
Why should you consider assets that appreciate when investing?
Investing is all about maximizing your return on investments while securing your principal amount. For example, buying gold ensures some form of return on investment and the safety of your capital at the same time. One of the benefits of appreciating assets is that they guarantee the safety of your capital and earn you a meaningful return compared to the risk you take.
Buying assets in this category can also help to hedge against inflation. You might not gain much in terms of returns but your capital will be safe.
