Appreciation and Depreciation Difference in Real Estate Investment

You may have heard that properties in the Philippines are among the most valuable and sought-after in the world. The Philippine real estate market has significant unrealized potential, and our islands have some of the most gorgeous locations in the world.

That's why, if you're a prudent investor who wants to maximize your returns on investment in the house and lot Philippines, this is your best chance. However, a real estate investor or buyer has to understand how property values rise and fall.

Differentiating Appreciation and Depreciation in Real Estate Properties

Over the last decade, the Philippines' GDP has increased at an impressive rate. That's why real estate investments are so promising now. Having said this, it's important to conduct your research before investing in an affordable house and lot for sale since property prices vary widely.

Everyone who wants to be a successful real estate investor or homeowner has to have a firm grasp on the concepts of appreciation and depreciation. In accounting, you record either a growth or a decline in the worth of your assets over time by using the terms "appreciation" or "depreciation," respectively.

Let's take a deeper understanding of these two in the next part of this article.

A. What does Price Appreciation Mean in Real Estate Investing?

When we say appreciation, it generally means the growth in value of your asset-- which includes the most common form of tangible assets such as currencies, bonds, real estate, or stocks-- due to various variables and factors in the market.

Appreciation also applies to the adjustment rate of the initial value of your asset from the time you acquire it. So, technically, when your asset appreciates, this means that you were able to earn more and increase the market value of your property, giving you a higher return on your real estate investment.

Causes of Property Appreciation

There are many possible causes why your investment can appreciate. Some of them are due to the following:

- A decline in the supply of your asset

- Changes in terms of interest rate

- A rising demand for your asset

- Inflation

There are also many types of currency appreciation that your asset may encounter, including earning new value more than your asset’s initial costs or even a growth in value not connected with any development or without asset building. You can also experience home appreciation depending on the economic climate or the current market trend, such as the status of the foreign exchange market or exchange rate.

Formula for property prices appreciation rate

In order for you to determine the appreciation rate of your real estate investment or even how foreign currency appreciates, you need to identify first some information regarding your asset, such as its initial value and current value. Make sure to also know the holding period or how many years you are owning your property, identifying the amount of time it is appreciating.

Let’s take a look at these example variables to guide us in computing your real estate appreciation rate:

Initial cost of your real estate property: Php 10 million

Current value: Php 12.5 million

Holding period: 5 years

Now, in order for you to compute your property value appreciation, you have to follow these steps:

Step 1. Divide your asset’s current value by its initial value at the time you bought it.

Step 2. Get the result from Step 1 and raise it by 1 divided by the holding period.

Step 3. Subtract one from your answer in Step 2.

Using the variables mentioned above, you can get this computation:

Quotient: 25 % or 0.25

Appreciation: 25 %

= (Php 12, 500, 000 / Php 10, 000, 000) ^1/5 – 1 

= 4.56% per year Appreciation Rate

B. What is Depreciation of Property Values?

When we say that it is a depreciating asset, it means that it is one whose value has decreased over time. The primary reason for currency depreciation is the wear and tear that occurs as the asset is used. This is particularly true for tangible assets, such as machinery or buildings, which can deteriorate due to regular use or exposure to various factors.

Two types of depreciation

There are two common reasons why an asset depreciates:

- Diminishing of the asset value over time

- Gradual weakening of your property value due to constant use caused by factors like wear and tear

Formula for yearly depreciation

Understanding how much an asset depreciates is crucial for managing your revenue or net worth. Failing to account for depreciation can lead to purchasing assets that end up costing more than they generate in revenue or value.

To avoid such a scenario, it's essential to know how to compute an asset's yearly depreciation. Let's use the values below for our sample computation:

Supposing you purchase a car and want to know its depreciation rate.

Initial cost of the car: Php 1.4 million

Expected salvage value: Php 300, 000

Car functional life: 4 years

Below are the steps to get the depreciated amount of your property:

Step 1. Find the difference between the initial cost of your car and its expected salvage value. Note: Salvage value is your asset value when its functionality ends. Some assets may still have residual value, while some end at zero.

Step 2. To get the depreciated amount, divide the result you got from Step 1 by your asset's number of functional years.

Using the variables mentioned above, you can get this computation:

Php 1, 100, 000 / 4 = Php 275, 000 a year depreciated value. This means that your car has a depreciation rate of 25% per year.

The expense of maintaining an asset may be stretched throughout its useful lifetime with the aid of depreciation, which can be calculated with some basic math. With this information, property owners are better able to foresee the income and costs associated with a certain asset, which in return, helps them in selling properties. In addition, knowing how to compute depreciation can also make changes to your operational profits and cash flow.

Remember that there is no predetermined timeframe for the depreciation of assets. However, not every physical item wears down over time. An example of this is an affordable house and lot made with quality and long-lasting building materials, such as Lumina Homes.

You can get your money's worth and a lucrative future value for your home investment with our communities' strategic location all over the country. Witness as your current market value increase over time with your property situated at the heart of the town or city, giving your prime proximity to commercial establishments, industrial parks, transportation infrastructures and facilities, as well as major roads and highways.

Schedule a site tripping now and get the most value out of your hard-earned money with a brand-new house from Lumina Homes!