By Rich Harvey, CEO & Founder, propertybuyer.com.au
There are plenty of misconceptions in the world.
They’re myths littered throughout our collective psyche – often shared as ‘fact’, but actually incorrect.
For example, fortune Cookies were really created in Japan, not China. Similarly, Marco Polo did not import pasta from China, nor was Napoleon Bonaparte exceptionally short (he was slightly above average for the time at 170cm).
But there is one misconception in the real estate stakes which I think people cling to as an absolute truism… and it’s this:
“Land appreciates, buildings depreciate.”
Taken on face value, the statement suggests every structure that’s more than 40 years old is virtually worthless. That’s when its depreciable value maxes out for accounting purposes.
From a terrace home in Surry Hills to Buckingham palace… are these properties only worth their land value?
Of course, they’re not. I consider this an overly simplistic misconception that, when properly explored, reveals some educational property principals.
Zero value is rare
First and foremost, depreciation of improvements to zero added value is virtually impossible. Unless a building has reached such an impoverished state of repair (or lack of useable design) that it needs to be demolished, it will provide some sort of added value to its land. You may not want to live in a ‘fixer upper’ forever, but so long as it provides safe, secure and functional shelter, it will be of some value.
Of course, most structures aren’t left to rot. There will be ongoing maintenance by their owners to keep them in a reasonable state of repair.
Buyers don’t discount the added value of a home to zero simply because its age has progressed beyond the maximum depreciation period.
Good design delivers premiums
Another concept that needs to be understood is that thoughtful design is worth something.
Think about this as an extreme example. Imagine you spent $500,000 building a structure containing three good sized bedrooms, a double garage, a functional kitchen, open plan living and patio. The fit out is above average and includes good quality fixtures and finishes. In short, the house would appeal to a wide range of local buyers and renters.
Now imagine you spent that same $500,000 creating a structure with eight squeezy bedroom, one tiny bathroom, a galley kitchen with no oven and a single common living area with no windows. The fit out is with cheap appliances and fixtures because of the tight budget. Also, the colour design is garish and offensive.
You’ve spent the same amount of money on each… which do you think adds the most value?
Of course, the first structure does – and here’s my point. Thoughtful design and finish add extra to a property’s overall value.
That’s why many classic homes – some more than 100 years old – often attract a premium price.
Structures generate income
It’s great to have land in an excellent location with appealing surrounds – but what’s going to keep the rain off your head on a stormy night?
That’s right – it’s the structure.
And when it comes to a property investment, we occasionally forget that it’s the building which generates most of the rental income. Sure, location and outlook are important, but tenants pay most attention to the accommodation. They’re renting rooms and floor areas. They’re leasing security and comfort.
This is the same for home buyers. While they’ll have their favourite suburb and desired land size, the real difference in price comes with what home is on that land.
Put simply, you can’t live on a vacant plot with no improvements.
Time appreciates the value of improvement
Here’s another factor rarely discussed.
The cost of building a home has, for time immemorial, increased. Building a home today costs more than it did 15 years ago. Building one in 15 years will cost more than it does now.
So, the value of existing structures increases regardless of their age because the cost of replacing them rises.
Think about it. Building a highset timber cottage in 1950 probably cost $5000. Nowadays, building the same type of structure and accommodation would set you back closer to $500,000 at a minimum.
Purchasers understand this. They know their option is to buy an existing home – no matter how old it is – or replace it with a new one. They will attribute a value to that older home that will be far more than its original construction price.
In short, as replacement costs increase, so does the added value of your existing home.
So, don’t get caught up in generalisation about real estate. Understand that catch phrases and throw away lines might simplify things too much. Experts know how the fundamentals of property operate and they can help you understand why it’s a good idea to pay a certain price for a particular property. Without their guidance you might choose to ignore an excellent buying opportunity and regret your decision in the future.
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