Today, we'll focus on the second type of appreciation in real estate: Forced Appreciation. Let’s go into the basics and see how this influences asset prices.
In our last blog, we covered how natural growth in regions and economies, coupled with regular inflation, translates to price increases, known as 'Market Appreciation'. Conversely, 'Forced Appreciation' occurs when growth is driven by the owner's efforts to enhance its use and appeal. Let's explore the various ways an asset owner can induce Forced Appreciation, which I will clarify through several examples in addition to the property
Increase the number of Baths
This is a typical case where a property gets functionally better when we enhance its specifications. Let us consider an example of a 2-storey 3-bedroom single garage home, which has 3 bedrooms at the upper level and has only 1 full bath. For such properties, if our upper floor plan allows us to add another full bath with a permit and if we implement that. This immediately does two things, firstly it enhances the usage of the property and pushes its market value upwards. With changes, the property is a 3-bedroom/2.5 Bath home. It is much more usable to a wide variety of buyer families/investors. They are willing to pay more for the same property, and this immediately increases its value. The second impact is that the change increases the property to attract more rent as now the tenant is willing to pay more for the same property. Due to the increase in rent potential now the investor community is better attracted to the property.
Increase number of Bedrooms
This is a scenario where there is a potential to carve out an additional bedroom in the property. One of our clients purchased a detached 1,150 sq ft bungalow above grade which had only 2 bedrooms at the upper level, the owners had changed the original 3 bedrooms to a 2-bedroom setup to make them bigger. Our clients bought this specifically for this upside potential in an otherwise bigger home. They applied for building permits with the town and changed it back to a 3-bedroom layout and made it contemporary open concept plan. As you can see here, the old plan had a kitchen and that was changed to a bedroom and the huge living area in the newer plan now had an open-concept kitchen. This enhancement of one bedroom increased the appeal of the property and it impacted the market value positively as usability was enhanced.
Increase the Footprint of the property
There are cases where the lot of a property is substantial enough that it allows you to increase the built area of the property. We recently had a similar instance where one of our excellent clients purchased a bungalow detached with had 3-bedroom 1 full bath at the upper level. They modified the plans to create a spacious ensuite for the primary bedroom with a complete walk-in closet, this addition of almost ~350 sq ft above grade, gave them an additional 350 sq ft of space in the basement as well. And it enhanced the usability of the property by leaps and bounds, for their living and also for future saleability. Almost, 700 plus sq. ft. of extra livable space was created. When lot is big and it allows as per zoning the ability to expand the current home, the new size increases its livability and appeal. These things are mostly possible in older bungalow-type dwellings where the lots are spacious both in terms of width and depth. This allows such lots to extend the current footprint of the dwelling and force appreciation.
Kitchen Remodelling
A kitchen is another awesome way to increase the appeal of a property, as soon as you remodel and change the cabinetry, back splash and countertops of a kitchen, it immediately enhances the overall appeal and attraction. The kitchen is a sure centrepiece of any property and having an attractive Kitchen increases usability and gives an instant appreciation to the property. In my experience if the kitchen is updated in a home, it makes the sale process smoother and attracts best dollar for you as per the relevant market.
The second Unit in the Basement
For major municipalities in the Greater Toronto Area, where the population is huge and there is a lot of rental demand. In such locations and in compliance with local zoning by-laws, if they allow for the creation of a second unit dwelling in the basement. It could be a very solid way to engage the upside potential of the dwelling. Here you can see the before/after plans for a typical basement and its evolution into a second-unit dwelling. This gives a possibility of an additional income stream from the lower unit and it serves as a mortgage helper for families buying the property for their own living. For investors, it gives them the benefit of dual cash-flows from upper and lower levels. Due to this increase in potential, the market price gets an immediate push with the creation of second units in the property. There are also ADUs or additional unit dwellings which if permitted by the local municipality – planning and building departments, can add an upside potential. The discussion on ADUs would require a completed dedicated talk and we will create it in one of our upcoming episodes.
Curb Appeal Updates
This is a technique where you update the landscaping elements in the front/rear of the property and make them look more appealing. Or update the front façade of the home with stucco or stone chips and make it look more contemporary. Replace or paint the front door/garage doors to make them look appealing. These changes even though sound minor but they go a long way to help increase the value of a property when put on market.
Here you got a glimpse of how the appreciation can be forced on a Real Estate asset and now let us discuss the requirements of such an endeavour, its something which is not made for everyone.
Capital Requirement
This form of appreciation is capital intensive, anything updates/additions you do to an asset require money to make it happen. This is the reason mostly you would see people not going for this route and just waiting for organic ‘market appreciation’ and building equity.
Under-Renting
During the time you do the updates/renovations to enhance the property, and specially when it is an investment property. It might mean that the property is vacant during the time of renovation. This is another financial loss due to the vacancy time.
To round up our discussions on ‘Natural Appreciation’ and ‘Forced Appreciation’ I want to say that the ideal combination is a mix of both. If as a homeowner, you do some remodelling to enhance the appeal of assets and then also be in the market for the foreseeable future. It would reap the compound benefits of both forms of appreciation. And this is coming straight from my experience in dealing on ground and assisting our clients during the journey.
Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate, and we will do our best to help.
Mudit Mehta
Broker of Record
ELIXIR REAL ESTATE INC.
Off: 416-816-6001 | [email protected]
