Appreciation Rate is the rate the Property is going up or down in value.
How the Real Estate Financial Planner™ Calculates It And Uses It
We express the Appreciation Rate in terms of rate per year, but calculate it monthly. We calculate it monthly by converting it to a monthly compound rate that will equal the full yearly Appreciation Rate when you use the monthly rate twelve times.
((1 + ($AppreciationRate/100))**(1/12) - 1 );
This monthly value is multiplied by the current value of the Property each month to determine the amount by which the Property went up or down in value that month.
We enter the initial value for the Appreciation Rate when we add the Property. Appreciation Rate will remain at this value until and unless you change it using Rules. To manipulate the value of the Appreciation Rate you might want to use Rules like the Set Value on Property Rule. This will allow you to change the Appreciation Rate to be another fixed value, a random value within a range you define, or a random value based on a normal distribution curve you define, or increase or decease using addition/subtraction or multiplication/division. How it is calculated depends on how you set up the Rule.
This is inline with our philosophy here: we provide you the tools to model the world as you believe it exists using Rules. We try not to dictate how you need to model it; instead we provide you with the flexibility to model it how you think it is. That’s why we say the Real Estate Financial Planner™ software is refreshingly complicated.
We expect the value of the Appreciation Rate to be in percent format. For example, if you want the Appreciation Rate for a Property to be 3% per year, enter 3.000 for the value (not .03).
We can use fixed values for the Appreciation Rate over the course of an entire Scenario. An example is shown in the Chart below.
We can change the Appreciation Rate one or more times over the course of the Scenario to model various types of real estate markets.
For example, we might set the Appreciation Rate to be sharply negative for a few years using a Rule to Set Value on Property. This will cause the Property Value to decline each month. Then, when we want to model the market recovering, we might run another Rule to Set Value on Property that changes the Appreciation Rate back to a positive value to simulate a real estate market recovery.
In the example Chart below, the Property started with a 3% per year Appreciation Rate. Then, a couple years into the Scenario, the Appreciation Rate drops to be -5% per year and the property value declines for a couple of years at that rate. Finally, a couple years later, we change the Appreciation Rate to 2.5% and allow the Property to recovery from a small, temporary market correction.
This is what the Rules to simulate this temporary decline and recovery in Appreciation Rate looks like.
If we look at the Chart of Appreciation Rate, this is what it would look like.
And here is what the Property Value would look like with this Appreciation Rate simulating a market decline and recovery.
Here’s another example. In this example, we are setting the Appreciation Rate to be a random number between -10% per year and +16% with an average of about 3% per year. Again, this was done with the same Set Value on Property Rule but instead of setting it to a fixed value, we’re setting it to be random.
This Rule will now make the Appreciation Rate equal to a random number. Here’s what a Chart of Appreciation Rates based on a normal distribution curve with an average of 3% looks like.
With this Appreciation Rate, the Property goes up in value about 3% per year, but much more erratically. This, in our opinion, better models reality.
Appreciation Rate is an important variable that we use to manipulate the value of Properties in our Scenarios.