Property Appreciation and Depreciation: How Does It Really Work?

property appreciation and depreciation

Ask any investor or your loved ones about what’s an excellent asset to invest in, and chances are they’ll suggest real estate properties. Among the many investment options out there, real estate is generally viewed as a desirable investment vehicle because of its stability and how much its value appreciates over time. 

While property appreciation can happen, it isn’t always the case for all. There are plenty of factors that affect a property’s value appreciation. Likewise, some things can cause it to depreciate. These two concepts are crucial for homeowners and investors to understand.

To help you make a sound investment decision, it’s best to understand what property appreciation and depreciation mean. 

What are Property Appreciation and Depreciation? 

Property appreciation pertains to the increase in value of a real estate property over time. The appreciation can be due to various factors, including demand and supply, location of the property, and future development plans in the area. 

To calculate property appreciation, subtract the initial purchase price of the property from its current price. Divide the total by the actual purchase rate, then multiply it by 100 to get the result. For example, if you bought a property for PHP 2.6 million in 2017, and it is now worth PHP 3.6 million, here’s a sample calculation of the property’s appreciation rate:

PHP 3.6 million – PHP 2.6 million = PHP 1.0 million

PHP 1.0 million / PHP 2.6 million = 0.385

0.385 x 100 = 38.5% appreciation rate

Meanwhile, property depreciation refers to the decrease in the value of a property over a specific period. While the land itself doesn’t usually depreciate (unless in case of soil degradation and erosion), the structures erected on the land do. Physical factors like lack of upkeep and structural damage cause a property to depreciate. Apart from that. economic factors like low demand and economic downturns also cause prices to fall.  

To calculate depreciation, subtract the property’s new value from the initial purchase price. Divide the result by the initial value to get the percentage. Taking the same example as above, but this time selling the property from its original price of PHP 2.6 million to PHP 1.9 million, the depreciation rate would be:

PHP 2.6 million – PHP 1.9 million = PHP 700,000

PHP 700,000 / PHP 2.6 million = 0.27 or 27% depreciation rate

What is Fair Market Value? 

Fair Market Value (FMV) is the rate of the property when you decide to sell it under normal market conditions. The price should be an accurate assessment of its value. You can have an assessor evaluate the property to know its appraised value. 

It’s important to know the FMV of your home before you decide to put it on the market. This way, you can make modifications or improvements to the property to increase its value

What are the Determinants of a Property’s Value? 

To see a significant return on your property investment, you should look into these things when purchasing a property. 

Future developments 

Aside from the current amenities and facilities available in the area, be on the lookout for future commercial and municipal developments that may positively affect the local real estate market. This can include plans for new schools, hospitals, parks, entertainment centers, and public infrastructure. 

Crime rate

Of course, people wouldn’t want to live in unsafe areas where crimes are commonplace. In fact, studies show that high crime rates can reduce property values in affected areas. A neighborhood with excellent security measures, a low crime rate, and good surveillance and response to crimes make an area more appealing than others.

Quality of life in the neighborhood

Does the neighborhood have strict security measures and safety protocols? Are the streets wide, tree-lined, and clean? Are there parks, amenities, public transportation access, and other features that can help enhance the residents’ standard of living in the area? The residents’ overall quality of life can also influence property costs. 

Effectiveness of local government units

Apart from the general development in the area, does the local government unit (LGU) have current and future plans in renovating roads and other parts of the district? Good local governance also speaks volumes about whether a property is worth purchasing or not. 

Renovations and upgrades to the property

Flipping the property or making significant repairs and upgrades is one of the primary ways to increase a property’s value. Many investors or homeowners choose this route to fetch a higher selling price for their real estate assets. 

Occurrence of natural disasters

A property situated in flood-prone areas has a lower value compared to those in uphill areas. To add to that, the damage done by floods and storms can depreciate the value of the property even more.

Overall market and economic situation

The nation’s economic condition and the overall market outlook are crucial in determining a property’s value. For example, if the demand is high and more people can invest in properties, property prices tend to increase. But if the economy is in a downturn and there aren’t many interested investors due to factors like a high unemployment rate, then properties see a dip in prices. 

What Can Homeowners Do to Maximize their Property’s Value? 

Selling your home and ensuring you get excellent returns can be a challenge. Below are a few things you can do to improve your property’s value. 

Pick the right location

Location is a factor that you can’t control but can freely choose to ensure that the property’s worth increases as time passes. For example, selecting a property in an ideal location for various demographics or choosing one that is close to business districts, schools, and public transportation and infrastructures is a good start. 

Ensure that the property is properly maintained

A property that manages to look mint and in tip-top shape from the lawn to the roof and plumbing is less likely to break down and require less renovation from future buyers. In addition, if you take care of the property well and make it move-in ready, the buyer is in for significant savings. In return, you get to price it at a steeper yet still reasonable rate. 

Repaint both interior and exterior walls

Something as simple and cost-effective as repainting walls can transform a property and make it look updated and pristine in no time. Neutral shades can make a property look modern and minimalist, appealing to many potential buyers. The fresh paint and desirable color can instantly give your property a much-needed facelift and help increase its value.

Don’t forget about landscaping

Mature, well-maintained, and neat landscaping add to the curb appeal of your property. It’s one of the first things that make an impression on prospective buyers, so it’s crucial to make it visually pleasing and attract buyers to walk through the door for viewing. Aside from making the property more sellable, good landscaping can also increase the property’s value.

Wrapping It Up 

Investing in real estate can bring in great returns when done right. So before you close a deal on a property, make sure that you do your due diligence and think about it carefully to guarantee it’s an investment that would bring you profits, not headaches, in the long run. 

Are you in need of professional advice on real estate investment? Get in touch with our team of experts here at RE/MAX for a free consultation! RE/MAX is a reliable real estate broker in the Philippines that can guide you about real estate investing.