Demand is one of the proven ways investment real estate appreciates in value. The logic is straightforward. When somebody (perhaps many) are interested enough to pay you more money for your property than you did originally, value is added to the property by virtue of that demand.
In this article we will consider four economic principles related to demand. We will describe the circumstances under which they might occur, and why they could increase the demand for (and result in adding value to) your investment real estate. Maybe even suddenly when you least expect it, and perhaps beyond your wildest dreams.
1) Scarcity of land
When your rental or commercial building occupies a plot of land where land has become scarce, chances are good that a demand for your investment real estate will increase.
This occurs commonly in metropolitan areas where there is little undeveloped land available. Twenty years ago, for instance, I saw three-story office buildings in Newport Beach, California demolished and then replaced by twenty-story office buildings. In this case, due to the scarcity of land in such a prime location, there was a demand for those (smaller) types of buildings created by developers.
Likewise, I once sold a ten-unit apartment complex to a customer that five years later resold the property for twice its value to a hospital that wanted that specific location for purposes of expansion. In this case, due to a scarcity of other probable sites in the surrounding area, the hospital was willing to pay a healthy sum (not for the structure, but for the land), and it enabled my customer to walk away with a hefty profit and real estate investing return.
2) Ease of Transferability
This concerns the demand created by potential buyers when the investment real estate can be readily financed. Whereas a duplex you own, for example, might appeal to many buyers due to the availability of adequate financing, the demand for your building could drop off sharply when you own (say) a thousand-unit complex where financing is limited to fewer buyers engaged in real estate investing.
So the ease (or lack thereof) of transferring your real estate from one buyer to the next plays an essential part in the demand for your property, and thus to the value that can be added to it.
This simply refers to the usability of the property and concerns its highest and best use. A commercial lot located near a railroad-loading yard, for example, might be better used for a manufacturing plant than for an office complex and therefore of higher value. Similarly, a single-family residence on an acre of land zoned for multifamily housing would likely be more valuable as the site for an apartment complex than as a single rental house.
This correlates to the upward desirability of the property mostly due to general trends in the economy. Investors typically move their money from one investment vehicle to another based on the investment’s ability to make a profit. That is, when stocks are hot investors put their money there; likewise when real estate is moving, investors start buying.
We saw this change of gears dramatically played out a few years ago when the stock market started to melt down. Frantic investors pulled their money out of Wall Street, and unless they stuck it under their mattress, chances are good they were dumping it into real estate.
Of course there is another (less spectacular) way you add value to your property even where there is no increase in demand from investors. It concerns the real estate investing principle that governs all real estate investments. Namely, that investment real estate prices are directly related to the net income that the property produces. So in this case, because there is a demand from tenants willing to pay more rent to occupy your building, you generate more income and therein increase your property’s market value.