How To Calculate Depreciation Of Property

Like any other thing, real estate does have a limited age. While the land remains valuable, the concrete structure degrades with time. Though the location plays a key role in the appreciation and depreciation of the property value, the age of construction is the key factor when it comes to calculating the depreciating value of the property.

What is depreciation of property?

Depreciation of property value is the decrease or dip in the selling value of your home. This is calculated as the 'factor' product of the total value of the property with the age of construction. It is important to understand that depreciation factor remains valid for the concrete structures and not the land. Hence, the value of the land remains same and benchmarked to the market value while the cost of the construction is evaluated on the basis of the total life of the building along with the current age. While land appreciates, construction always depreciates. When a buyer invests in an apartment property, he is also buying an FSI of the land where the project is built. The reason why resale flats are sold at higher prices than the buying cost is because the flat is demanding the appreciation of the land. For independent houses, it is the building component which depreciates while the land is valued at market price.

Also read: This Is What Happens When The Market Value Of A Property Falls

How to calculate depreciation of property?

For an independent house, the average lifespan of any building is 60 years. To calculate the depreciation of building component, take out the ratio of years of construction and total age of the building. For instance, if a buyer is selling a property after 10 years of construction, the selling price of the structure can be calculated through 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. Add the market value of the land with this price to get the reasonable selling price of the home.  

This depreciation factor might get null and void if the location is too much in demand and there is a scarcity of land. Another factor which might further impact the cost of a home is the obsolescence factor. This stands for those elements which have become outdated like electrical fitting, plumbing, construction type, designing, interiors etc.

Bargaining and Negotiations

It is important for the seller to be rational and logical in setting his expectations while selling a property. Considering the old property needs repair work and renovation, a buyer will be spending at least 5 per cent of the cost of the house on redoing it. A realistic selling price would help the seller in finding a buyer without any hassles.

Also read: Confessions Of An Indian Real Estate Buyer