An investment in real estate is like an engine. It has many moving parts, working to make you money. One of those parts is property appreciation. This part is responsible for making a property go up in value.
But like with parts of an engine, malfunctions can happen.
Over the years, it is common and even likely that this part will fail, causing prices to stay flat or fall at some point. Property appreciation can make you a lot of money or cause you to lose a lot of money. And whether property values go up or down, and by how much, is affected by several factors, including when you buy, where you buy, and what you buy. Using these factors, let's analyze property values in Los Angeles in the past 30 years.
When
Some say that property values in California go up by about 4%-6% per year. But this depends on when you buy and how long you hold on to the property. For example, if you bought a single-family house in Los Angeles in 1990 and sold it 10 years later, you would have sold at a loss of about 7%, a decrease of about 0.7% per year. Meanwhile, if you bought a house in 1996 and sold it 10 years later, you would have sold it at a huge gain of about 216%, an increase of about 22% per year.
Source: California Association of Realtors historical median price for single family homes. Info adapted into chart.
Where
Not all properties or markets appreciate or depreciate in the same way. For example, during the 10-year period mentioned above, where property values in Los Angeles went down by almost 7%, in the city of San Francisco, during the same period, properties went up by about 50%. LA went down and San Francisco went up because property appreciation can be affected by general economic conditions, but also local ones. During this period, San Francisco’s local economy was a major player in the dot-com boom, which made property values in the city rise.
Source: California Association of Realtors historical median price for single family homes. Info adapted into chart.
Where you buy can further be divided into two categories: high-end and low-end neighborhoods. Property values in higher-end neighborhoods tend to be more stable than in lower-end neighborhoods. For example, during the Great Recession, from 2006 to 2010, values in the affluent neighborhoods on the Westside of Los Angeles dropped by about 20%. This includes areas like Santa Monica, Westwood, and Beverly Hills. Meanwhile, in the low-end neighborhoods surrounding South Central LA, values dropped by over 55%, more than double. Similar decreases of over 50% were also seen in the desert cities outside of Los Angeles, like Riverside.
Source: CLAW MLS, custom agent search.
Note: So why buy one house in Santa Monica, when you can buy four in the desert? Because Santa Monica has more stable property appreciation, it’s more resilient during recessions.
It's important to note, though, that not all lower-end neighborhoods stay that way forever. A lower-end neighborhood in transition to high-end can surpass an established high-end neighborhood in appreciation rate. In the boom prior to the Great Recession, the transitioning neighborhood of Venice Beach went up by 150%, while the rest of the Westside went up by 100%.
What
The purple house with no windows that only you like will not appreciate the same as one with more universal appeal. Additionally, you can actively push a property's appreciation above the general market through repairs. It is not out of the question to be able to buy a beat-up house, put $50k into it, and have it appreciate by $100k or more after repairs. But not all properties will appreciate the same after repairs. If you buy an already fixed-up house, the best and biggest house on the block, even if you put gold toilets in the bathroom, it will not appreciate above the market’s organic rate. Identifying properties that you can actively cause to appreciate is more an art than a science.
Note: Don’t buy the biggest most expensive house on the block.
Summary
In summary, property appreciation can be a volatile, unreliable, capricious little beast. Sometimes it goes up; sometimes it goes down. My recommendation is, one, don’t buy because property values will go up—buy first because you can afford to buy, because you're comfortable with the payments. See appreciation as a bonus, something that may or may not come, at least in the short run. Historically speaking, if you wait long enough, you will get that bonus. And, two, remember that property appreciation is only one part of the money-making engine that is real estate.
For the other ways that you can make money in real estate, make sure to check out my YouTube video: The 5 benefits of investing in real estate.
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About the Writer: Daniel Rangel is a real estate agent, with over eight years of experience in residential and residential income sales transactions. He is always accepting new clients. Reach out to him for free consultation.
