How to Calculate Real Estate Appreciation

Before looking at the actual formula for how to calculate real estate appreciation, it’s important to understand one of the major variables: the fair market value of a real estate investment property.

The fair market value of a rental property is the price that an investment property will sell for in the real estate market. The fair market value, by definition, depends on a few different factors:

These conditions, while possibly ideal, amount to the “fair” aspect of the fair market value of rental property. While some argue that these conditions are hard to account for in the market, a proper real estate market analysis will return the fair market value of a rental property. This will allow for an accurate calculation of real estate appreciation.

Real Estate Market Analysis

Fair Market Value vs. Market Value

Fair Market Value vs. Appraisal Value

Now that you understand the basics of real estate appreciation and fair market value, it’s time to move on to how to calculate real estate appreciation. There are two steps to calculating real estate appreciation:

Step 1

Future Growth= (1 + Annual Rate)^Years

The first step involves calculating future growth in the value of real estate by figuring out the annual rate. This is where you will have to do a little extra research. The annual rate of the real estate appreciation growth is easily available for the national market. The US house price index reveals that house prices have increased by 3.4% a year (since 1991). This is what we’ll be using for the sake of our example.

To the national annual rate (0.034), add 1. For the years, consider how many years you plan on holding onto the investment property. With this, you will have the future growth rate of value.

Step 2

Future Value= (Future Growth) x (Current Fair Market Value)

Example

Future Growth = (1 + 0.034)⁵

Future Growth = 1.18

Future Value = (1.18) x (150,000)

Future Value = $177,000

In five years, the investment property will be worth approximately $177,000.

Finding Out the Value of Forced Real Estate Appreciation

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