How Rental Property Depreciation Works

Quite contrary to a piece of a plot in which the resale value keeps on appreciating, the value of residential property declines. Still, the latter creates opportunities to earn money over time through rent. Nevertheless, the overall selling price of rental property depreciates with time due to continuous use by tenants. If you are a real estate investor, you need to know how rental property depreciation works so that you can purchase pre-used real estate at the right price.

What Is the Rental Property Depreciation?

The rental property loses its value over time due to wear and tear damages after continuous usage. As a result, the property fails to retain its appearance and strength, and so its selling price drops. This phenomenon causes a reduction of an asset’s market price is known as depreciation.

So, if you are in the real estate sector and looking to buy a flat, apartment or house, you need to know how you can calculate the depreciation of a property’s value. It will help you appraise the reasonable price of a property.

Which Properties Depreciate over Time?

Following are some real estate properties which lose their market value with time:

• Properties which are used as an office building
• Properties used as income-generating sources
• Properties that are subjected to wear and tear damage, decay, or those that have become obsolete, etc.
• Properties that will last more than one year

Note: Land properties do not follow this phenomenon of depreciation as they do not lose their entire usability. 

When Does the Rental Property Depreciation Process Start?

A rental property starts depreciating from the day it becomes available for service or rent.

Let’s assume that you purchased a flat in Mumbai on 20^th July 2021, rented it on 20^th September 2022, and received your first rental income on 20^th December 2022. In this scenario, rental property depreciation will begin on 20^th September 2022, the day its renting started.

Calculation of Property Value Depreciation

The major variables you need to consider while calculating a property’s depreciation value are the property’s age and its useful lifetime. Following is the calculation process:

First, you need to divide the total age of the property by the total useful lifetime. Then, to get the depreciation value, you need to multiply the result by the purchasing cost of that property.

Let’s consider that the purchase price of your new flat is Rs. 1 crore, and you have rented it for 10 years. If its useful age is 70 years, its depreciation value will be {Rs. 1 crore x (10/70)} = Rs. 14,28,571. So, after 10 years, your flat’s price after depreciation will be Rs. 1,00,00,000 – 14,28,571 = Rs. 85,71,428.

What Is Property Depreciation Calculator?

It is an online tool to calculate the resale value of an asset after considering the depreciation. It can help you calculate the resale price instantly and accurately. You will simply have to access this calculator and enter data like the property’s price, rate of residual value, useful life, etc. After this, you can find how much the price of your property will reduce after a certain period.

Factors Causing Depreciation in Rental Property

Following are some of the factors that can cause depreciation of your rental property:

• Deterioration of Structure

Over prolonged use, the structure of a building deteriorates, and it loses its initial strength and aesthetics. Besides, you need to put in more time, effort and resources into maintaining an older property. This leads to a higher depreciation rate for these properties. In this regard, you should know that you can minimise the impact of depreciation if you get timely maintenance done on your property.

• Location

You can witness varied depreciation rates from one location to another. Generally, properties attract a much lower rate of depreciation if they are in posh areas. This is because road connections and other civic amenities are better in these areas than in an unsophisticated location. Apart from this, burial or cremation grounds or slum areas near a property can attract a higher rate of decline in market price.

• Legal Issues

Properties with legal disputes depreciate at a higher rate as buyers avoid purchasing such assets. This is because purchasing these estates involves the risk of getting into legal challenges.

Factors Causing Exception to Depreciation

There are several reasons why the phenomenon of depreciation may not work as expected:

• Emotional Connections

If home buyers have an emotional attachment to a particular area, they may agree to buy a pre-owned or rental property from that location at a higher price. They may disregard its depreciated price since their main concern would be to purchase a house/flat from that location only. 

• Scarcity of Land

Besides a well-developed transportation system, scarcity of land is also one of the major reasons behind the higher resale value of properties in metro cities. It follows the demand-supply curve. As a result, real estate prices from these locations may not follow the phenomenon of depreciation.

Final Word

The residential property does not retain its selling price over the years since it keeps on attracting several minor to major damages. This is why you need to consider rental property depreciation while appraising the current price of a flat or house.

Frequently Asked Questions