Property values appreciate in value over time
due to inflation. Inflation is caused by an increase in the amount of
money in circulation. The value of money declines when the supply of
money increases and the end result is increased retail prices. The cost of
the land, construction materials, labor costs, building permits and fees,
etc. go up over time making it more costly to replace an existing property.
These factors alone do not guarantee that an income property will increase
in value. Factors such as poor upkeep, the general decline of an area,
economic obsolescence, economic conditions, reduced demand, over supply, increased crime levels, etc. can
cause properties to decline in value even when replacement costs are
increasing. In summary, personal residences and income property
usually appreciate in value over time due to inflation because the cost to
replace them has increased.
In most cases, you can increase the value of real estate by
making cost-effective improvements. Improvements such as siding, a new
roof, a new addition, new carpeting, landscaping, paint, etc. can increase
the value of both personal residences and income property. Some
improvements, dollar for dollar, will result in a greater increase in value
than others. You should plan carefully and make improvements that
result in the highest level of appreciation for the dollars that you spend.
Keep in mind that if you make too many costly improvements, you might not
recover those costs when you sell. Small, cost effective improvements can sometimes
deliver the greatest bang for your bucks.
Supply and demand can cause the value of real
estate to go up or down. Over supply can cause real estate values to
fall and undersupply can cause prices to appreciate. Demand for real
estate can vary greatly in different areas of the country and in different
areas of a city. The demand for real estate is affected by the
availability of jobs, the level of interest rates, general economic
conditions, the availability of land,
proximity to shopping, schools, parks and churches, infrastructure
improvements, population changes, desirability of an area, crime levels,
property tax rates, zoning changes, etc.