"Appreciation" is the term applied to the increase of the value of your investment property.

If you have owned the investment property for a period of time, you can determine the increase in value by subtracting the Original Value from the Present Value.

To determine the *percentage *of Appreciation, you divide the Appreciation by the Original Value.

A = (PV - OV) / OV, where

A is the Appreciation Percentage

PV is the Present Value

OV is the Original Value

For example, you bought an investment property for $400,000 a year ago and now you have determined by using the market Capitalisation Rate for this property that is has a value of $426,800.

A = (PV - OV) / OV

A = (426,800 - 400,000) / 400,000

A = 26,800 / 400,000

A = 6.7

The investment property has appreciated in value 6.7% in one year.

## Past Value

If you've owned the property over several years and would like to determine the Average Appreciation Rate per year:

Say you bought a rental house for $385,00 4 years ago. Today it has appraised at $579,000.

It has appreciated $194,000 in total over the course of 4 years. $194,000 divided by 4 years = $48,500.

Average Appreciation Rate would be based on that average of $48500

385,000 / 48500 = 7.938

The investment property has appreciated in value on average 7.94%

## Future Value

Most of us are interested in determining the Appreciation that will occur in an investment property that we are considering purchasing.

For this, we use the Future Value Calculation.

FV = PV (1+I), where

FV is the Future Value

PV is the Present Value,

1 is 1, and

I is the Percentage Increase Factor.

For example, we buy a $400,000 house and we want to know what will happen if it increases 6.7% in value each year.

FV = PV x (1 + I)

FV = 400,000 x (1 + .067)

FV = 400,000 x 1.067

FV = 426,800

After one year, the house will have appreciated in value to $426,800.

Now, for the Calculation of the appreciation for the second and subsequent years, you use a new PV figure for the ending of the prior year, which is the same as the beginning of the year of calculation.

In this Example, for the second year we would use a PV of $426, 800 because that is what the value was at the end of the first year.

FV = PV x (1 + I)

FV = 426,000 x 1.067

FV = 455,396

At the end of your second year of ownership, your house will have appreciated to a value of $455,396.

See a Free Calculator to use: __https://www.calculatorsoup.com/calculators/financial/future-value-calculator-basic.php__

## Equity

The above Calculation will serve you well if you pay cash for the investment property, but few of us do. We usually have debt on the property as returns are increased when leveraged.

If you have debt on the property, then what you actually have that is appreciating in value is more than just the Fair Market Value (FMV) of the property, although that is going up.

What you have that is actually appreciating in value is your Equity in the property.

There is a Calculation for Equity.

E = FMV - MPO - L - OD, where

E is for your Equity in the property,

FMV is the Fair Market Value of the property,

MPO is the Mortgage Payoff Amount,

L is the Liens on the property, and

OD is the Other Debts on the property

A month after you purchase the property, the FMW will have already gone up, because that is what property tends to do. And the Mortgage Payoff amount (MPO) will go down, because each of your mortgage payments will be a combination of interest and reduction of principal. The reduction of principal amount will reduce your MPO. The reduction will be small at the beginning, and huge in the final years of the mortgage.

To Caclulate your probably Equity in the future, you would use the Future Value Calculation to determine the new amount of the FMV, and then use your Amortization Schedule for your mortgage payments that you received form your lender to get your Mortgage Payoff amount for the specific date you are calculating for.

Then plug the two numbers into the above Equity Calculation to determine your Equity at any point.

## Value and Capitalisation Rate

In using all of these Calculations, it is very important that you have an accurate number to use for the "Value" factor in the Calculations. Without a correct FMV input, your output will not be as accurate as it should.

The best number to use is the actual selling price of comparable properties in your market.

But if you do not know what these are, or do not have enough comparable sales, or your property is unique and there are no comps, then you can still Calculate a figure for the Value. See __Value__

That Calculation will require you to also Calculate a Capitalisation Rate, referred to as the Cap Rate. See __Cap Rate__

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