Investing for appreciation carries higher risks and higher rewards.  Investors should focus on selecting the right market and the right property to execute this strategy.  While this strategy usually yields very little cash flow during the life of the investment, investors profit when they sell their investment property for a gain.

Appreciation focuses expected future rent growth.  Traditionally, markets with high appreciation experience strong job growth and have a significant retail presence.  Real estate markets experience a life cycle.  Appreciation ebbs and flows as prices increase and decline.  As major metro areas price homeowners and investors out of the market, they begin to move to less populated areas, which in turn begin to see a price increase.  As these areas become more populated, pricing pressures ease in major markets and the migration ceases.  Understanding this cycle helps investors better understand when and where to invest to capture the highest amount of appreciation.

Selecting the right market is paramount to execute this strategy.  Young markets with significant upside potential represent the best chance to minimize downside risk.  Additionally, small to mid-size markets with easy access to major metro areas, jobs and retail aid in future rent growth.  Be careful of markets that appear to be too strong or experience unreasonable appreciation levels.  As markets appreciate, affordability declines.  At some point all markets reach a tipping point where appreciation slows, stops or declines because they become unaffordable. 

Investors can also create value by choosing the right property to invest in.  In these markets renovations can make sense.  It’s usually best to choose the properties with the most upside potential, but it is equally important to choose the properties that suit the investor.  Large renovations take time, effort and capital.  Investors with limited capital resources investing in these markets should choose projects that need cosmetic renovations or upgrades. 

Remember, the goal is not to have the best house in the neighborhood, but rather to achieve the highest rent with the lowest capital spend.  Map out investment items and compare each item to an expected rental increase to ensure the upgrade or renovation makes sense.  Even if every home has newly remodeled bathroom, it could more sense to charge a below market rent then to actually remodel all the bathrooms in a home.

Appreciation and buy and hold usually go hand and hand.  Properties that appreciate 5% per year return about 25% per year to an investor, who put 20% down to purchase the property.  Let the appreciation and leverage work together.  Investors should watch the market closely for opportunities to exit or upgrade their investment.  As markets mature and appreciation slows, investors should be prepared to cash out and move to another growing market.