Why Does A Structure Tend To Decrease In Value

Category: Finance, Real Estate.

When I am looking for real estate what makes my mouth water.

Updated kitchens? Huge cathedral ceilings? Recessed lighting? I love big lots. Nope. The bigger the lot the more I get excited.

Over time large lots tend to appreciate faster. Why do I love big lots. In real estate one of the cardinal rules is that generally land increases in value and general structures decrease in value. As a structure gets older it tends to get farther away from safety codes. Why does a structure tend to decrease in value? But generally properties tend to increase in value because the rate at which the land appreciates outpaces the rate at which the structure is decreasing in value.

Because land tends to appreciate I usually prefer properties that have more of the current value in the land than in the structure. When you are hoping to sell your property for more in a few years its best to look at the dirt and not the house. This means that a property in a new subdivision where the structure account for 70 of the value is not appealing. Of course what is even more appealing is a centrally located 5 acre lot with say a 500 square foot house. For instance properties close to a city center can have 65 to 70 percent of the value is in the land. Lets run the numbers on a few scenarios to see what I am talking about.

First let us look at a property where 70 of the value. Lets assume that land appreciates at 7 percent a year and structures depreciate at 2 percent a year. Year Structure Value Land Value Total Value. 0 10 90 100. 1 6 92 108. 2 216 10976 11192. 3 847 11374 12221. 4 493 12444 13938. 5 154 13240 14393. What I find surprising is that alot of buyers that are concerned about appreciation will buy a house on a small lot on the far outskirts of the city. In the end the differences between these two properties is pretty significant. They look at the upgraded countertops and other amenities as a sign that they will see significant appreciation.

I want to be clear I am not saying everyone should buy a property where land value accounts for most of a properties value. What they don' t realize is that alot of these features that are currently in vogue might not be popular in a few years. In many cases people enjoy nice amenities that come with a house and the idea of living in an older home holds little to no appeal. But if your primary concern is investment when you are evaluating a potential property you should pay more attention to the lot than the house.