Here’s a Guide For Calculating Depreciation Of Property
As a property seller, Suresh Krishnan from Chennai wants to know the resale value of an apartment, situated in the southern neighbourhood of the city and is 10 years old. He also enquires about the depreciation value of the building, keeping in view its age, which could impact the total property value.
Although location of a property can significantly alter the sale prices, certain physical aspects like age of the property are also pivotal in establishing the total property value - which is important both for the buyer and the seller - to get the best deal. Physical deterioration of buildings, due to age or wear and tear, is an inevitable phenomenon. There is a direct relation between the physical life of a structure and its property value. Over time, a property tends to depreciate. However, land is an asset which remains valuable for several years and hence its value does not depreciate.
The rule that ‘while land value always appreciates, house value depreciates’ is one of the basic tenets of property dealings which many investors and industry experts are aware of.
MakaaniQ explains the method for calculating depreciation of property:
Depreciation of property
Depreciation of property value of a house is the reduction in its sale value. It is calculated as the 'factor' product of the total value of the property with the age of construction. The depreciation factor remains valid only for the concrete structures and not land. Therefore, the land value remains constant and benchmarked to the market value whereas the construction cost for the building is evaluated on the basis of the total life of the building along with the current age.
It is to be noted that when you buy an apartment property, you are also purchasing an FSI of the land where the property is constructed. Thus, the appreciation of the land is usually included in the total value of resale apartments. This is why you may find some resale apartments as costlier than their original buying cost. Also, in case of independent houses, the building component depreciates whereas land is valued at market price.
How to calculate depreciation of property?
The average lifespan of any building, especially an independent house, is 60 years. The depreciation of building component can be calculated by taking out the ratio of years of construction and total age of the building. For example, if a property is being sold after 10 years of construction, the selling price of the structure will be calculated by the following formula:
Number of years after construction : Total age of the building = 10 : 60 = 1:6
The remainder of the useful age is the actual selling price of the construction. Now, add the market value of the land with this price. The result denotes the reasonable selling price of the structure.
This depreciation factor may not be taken into account in case the location is highly in demand and there is a scarcity of land. Moreover, the obsolescence factor is another technical component that can impact the house value. This refers to elements that have become outdated such as electrical fittings, plumbing fixtures, designing, interiors, construction type, etc.
Tips for sellers
Sellers must avoid overpricing their property. Since the old property would require repair works and renovation, a buyer would be spending a minimum of five per cent of the property cost for undertaking the task. It is thus logical to quote a realistic selling price, or the seller should refurbish the house and then sell at the original price.