Understanding Real Estate Appreciation

Adewale thought in his heart, “I should buy a plot of land from John, the realtor that calls me every day to tell me about a land at Lekki. I need to invest this profit I made on my business last month.” He proceeds to call the realtor.

Phone conversation 

Adewale:  Hello John!

John: Good morning Mr. Adewale, how have you been? 

Adewale: I’m fine, thank you. I’m calling as regards the land you told me about at Lekki. Is it still available for ₦1,000,000?

John: Oh! Mr. Adewale! Thank you for calling, the land is still available for sale at ₦1,000,000, and is open for inspection.

Adewale: Alright. Can we fix a time for inspection tomorrow?

John: Yes Mr. Adewale. We can meet up at my office by 9:00am.

Adewale: Alright John, I’ll see you tomorrow. Thank you and enjoy the rest of your day.

John: Alright, see you tomorrow!

15 years later…….

Adewale is older and has plans to retire.

Buyer: Good morning Mr. Adewale, I’m calling in reference to our discussion last week. Please can we get you to sell your land at Lekki to us for ₦18,00,000?

Adewale: Aah, Mr. Bola. Honestly, I can only sell that land for ₦25,000,000, it’s in a prime location, and you will get value for your money, so please let’s close the deal at ₦25,000,000.

Buyer: Hmm… Mr. Adewale, there’s no problem. I’ll get my lawyer to set up a meeting with you for Thursday. Thank you!

Adewale: Alright, Mr. Bola, see you on Thursday. Thank you!

If you read carefully, you’ll understand from this short dialogue set in two different periods that a man bought a plot of land for ₦1,000,000 at a likely underdeveloped area, and years later due to the development that has happened in that environment and many other factors, the location has become one of the developed areas in Lagos, where everyone wants to own properties. 

From the dialogue, you can see that Adewale decided to sell the plot of land he bought 15 years ago because he was making plans to retire in a few months.  He eventually sold the land for a whopping sum of ₦20,000,000!! 

What happened in this instance, is what we like to refer to as REAL ESTATE APPRECIATION.

Appreciation in real estate refers to the increase in the value of a real estate property over a period of time. One of the goals of investing in real estate is to get a positive return on the investment when the investor decides to sell the property in the future.

The price appreciation of a property can depend on a variety of factors, such as the location, future development plans, the physical structure, or the demand and supply of property in a given location. Property owners can also force appreciation of their properties by carrying out repairs and renovations on the property.

Real estate investors are always keen to purchase a property when they know that it will appreciate in value in a few years. It can become a source of financial security in the future, for their children, or even as part of their plans for retirement. 

 Appreciation also provides the flexibility of selling the current property at a higher price than they originally paid to earn high Returns on Investment. 

Real estate investors make money through rental income, any profit generated by property-dependent business activity, and appreciation. 

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Real estate values tend to increase over time, and with a good investment, you can turn a profit when it’s time to sell. Rents also tend to rise over time, which can lead to higher cash flow.

The main factors that influence real estate appreciation include:

  1. Demand and supply

The forces of demand and supply also play out in the real estate industry. When the demand for homes is on the rise in a given geographical location, property prices in the area will also go up if the supply of new residential houses does not increase fast enough as the demand.

The increased demand for houses in a given location tends to attract the attention of investors who buy or build residential houses with the goal of putting them for sale when the supply declines and prices increase. End users would then be willing to pay more for a house that meets their preferences in order to beat other interested buyers. The extra gains that investors earn above what they originally paid for the house is the price appreciation of the property.

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2.Location

It is all about doing your homework and understanding the market you are buying into. It is common knowledge that commercial properties in major urban cities tend to come at a higher price. However, that doesn’t mean that strong returns cannot be achieved in remote places like Ikare, Akure, Nekede, Obinze but it would be a lot difficult for these places to compete effectively with places like Abuja, Lagos, Port Harcourt, Enugu and Calabar just to mention a few. Without mincing words, having a property in these places are more likely to achieve a stronger Return On Investment (ROI).

Choose a promising location. Promising does not mean the most expensive or cheapest. Promising means a place where people would like to live and this can be for a number of reasons. In most cases, people tend to invest in a property close to where they live as they are more likely to know this market better than anywhere else and they can easily spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.

However, location is not the only yardstick to achieve a high return on investment. It goes hand in hand with the ability to identify and utilize the opportunities available, doing your due diligence and taking risks.

3.Research the market

In terms of capital gains and income, property investing has paid off handsomely for many people but it is essential that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages.

If you know someone who has invested in a buy-to-rent or is into commercial properties, ask them about their experiences , the good, the bad and the ugly, and learn from them.

4. Property Market Drivers

Price appreciation of real estate investments can also be affected by any developments that exert a positive impact on the attractiveness and desirability of living in a given area. While the existing infrastructure can affect the property prices at the moment, you should watch out for any government and commercial plans for putting up new infrastructure in an area in the future.

Potential property drivers may comprise the development of public transport facilities such as rail, road, or airport; new office complexes; construction of a shopping mall or hypermarket; and proximity to schools, universities, hospitals, and restaurants, etc. Buying a property in an area with such future development plans guarantees property owners massive real estate appreciation in the future.

Are you thinking about investing in real estate? Why not book a free consultation to speak to our sales representative? You’ll get all answers to all the questions you need answers to, and the information you need on real estate investment.
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