When making financial plans, such as deciding whether it’s a good idea to buy a house, your calculations can include what you expect the home to be worth in the future. To figure out how much the home will appreciate, you can calculate the future value based on the expected appreciation rate for the property. Similarly, when comparing how investments have done in the past, you want to be able to compare how much the values have increased relative to your initial investment so that you can determine which ones have appreciated the most.
TL;DR (Too Long; Didn't Read)
You can calculate the appreciation rate on an asset using the value at the time you purchased the asset and its current value, as well as the amount of time that has passed since it was acquired.
Calculating Future Value Based on Appreciation
To calculate the amount an investment will be worth in the future based on the appreciation rate, you need to know how long the investment will appreciate and how much it is worth at the start. First, divide the appreciation rate by 100 to convert it to a decimal. Second, add 1. Third, raise the result to the power of the number of years the investment will appreciate. Fourth, multiply the result by the initial investment value.
For example, say that you are buying a house for $120,000 and you expect it to appreciate by 1.8 percent each year for the next five years. To calculate what it will be worth at the end of five years, first divide 1.8 by 100 to get 0.018. Second, add 1 to 0.018 to get 1.018. Third, raise 1.018 to the fifth power to get 1.093298847. Fourth, multiply $120,000 by 1.093298847 to find that the house is expected to appreciate to a value of $131,195.86 after five years.
Calculating Appreciation Rate
If you know how much an investment was worth previously, and you know how much it is worth today, you can also calculate how much the price has appreciated, both as a dollar amount and as a percentage. To calculate appreciation as a dollar amount, subtract the initial value from the final value. To calculate appreciation as a percentage, divide the change in the value by the initial value and multiply by 100.
For example, say your home was worth $110,000 when you bought it, and now its fair market value is $135,000. To find the appreciation as a dollar amount, subtract the initial value of $110,000 from the final value of $135,000 to find that the home has appreciated by $25,000. To convert that to a percentage, divide $25,000 by $110,000 to get 0.2273. Then, multiply by 100 to find that the price appreciated by 22.73 percent.
References
Tips
- The calculations for appreciation work for any asset that increases in value over time, from gold and jewelry, to art and old comic books.
- Assets like homes and stocks can also lose value or "depreciate." Calculating depreciation follows the same steps used to calculate appreciation; if an asset loses value, the result is a negative number.
- If you sell an asset that has gained value over time, Uncle Sam makes you pay capital gains tax on the total profit or gain. Capital gains tax is capped at a maximum rate of 15 percent for assets you hold longer than a year and equals your income tax rate for assets you hold less than a year.
Writer Bio
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."