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So I was reading that investing in property is a safe and solid investment (but low on return). This is based on how the prices rise e.g. a property price in the 1980's vs 1990's vs 2000's vs 2015. To be honest I don't understand the rationale. If the building is e.g. from the 1980's (or older) wouldn't the value decrease as it is too old? i.e don't buildings lose their value as time passes?

I think that most people interested in buying a property would look into newer houses and not older ones that would require maintainance. So what am I misunderstanding here? Is this true only for properties used for commercial purposes?

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    What country do you live in? Different regions have different building practices. For example, most Japanese people do not expect their houses to last a lifetime. Whereas most Americans expect well maintained houses to last a century. Also, zoning laws and planning laws vary, even within a single country. If it is hard to get permission to build on farmland, and if the economy is growing in spite of the restrictions, then the price of a buildable lot will tend to increase. – Jasper Dec 21 '15 at 19:25
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    Investing in property is neither safe nor solid. – ChrisInEdmonton Dec 21 '15 at 19:58
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    There are two components to making money in real estate: appreciation and cash flow. There is a saying on landlord forums "you make your money in rentals when you buy", that is, you focus to purchase rental property that is undervalued with upside potential. While you operate it as a rental, you may be "depreciating" the value, which is "losing value as time passes". The details depend very much on the country. What country is this for? – user662852 Dec 21 '15 at 19:58
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    Buy land - they've stopped making any more! – Thorst Dec 22 '15 at 7:32
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    A house from the 1980s isn't old. My house is 120 years old and I think there's every reason to believe it'll still be standing in 2135. The house I grew up in (partly) dated from the 1430s. Like many buyers I actually prefer older houses since I prefer the character and design of these older properties. – Jack Aidley Dec 22 '15 at 16:32

10 Answers 10

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When you buy a property the house or the building goes down in value every year (it gets depreciated) similar to when you drive a new car out of the lot. However, it is the land that increases in value over time.

As land becomes scarcer the value of land in that area will increase in value, as does land in sought after areas. If more people want to live in a particular suburb the land value will keep on increasing year after year. Sometimes established areas with houses built in the 1980s or even earlier can be worth much more than newly built areas. It comes down to the supply and demand of land and houses in a particular area. You might even get a situation where a run-down dilapidated house in a very sought after suburb sells for more than a brand new house in a less sought-after suburb nearby.

Properties can be a very good investment and they can be a very poor investment. It can largely depend on the decisions you make in buying your investment property. The first thing you need to make a decision on is the location of the property. If you buy a property in a good area that is well sought after you can make good capital and rental returns over the long run. If you buy poorly in an area no one wants to live in then you might have problems renting it out or only be able to rent it out to bad tenants who cause damage, and you may not get any capital gains over many years.

The second thing you need to decide on is when in the property cycle you buy the property. If you buy at the right time you can get higher rents and make some quick capital gains over a relatively short time. I can provide a personal example of this situation. I had bought a house (in Australia) in 2007 for $240,000 at a time when interests where at their highest (9%), no one was buying property and rents were on the increase (with low vacancy rates). Today, eight years after, we are getting $410 per week rent and the house next door (in worse condition than ours) has been put on the market asking for between $500,000 to $550,000 (most houses in the area had been selling during this year for over $500,000). So you can say that our house has more than doubled in 8 years. However, up to a few months ago houses were selling within 2 weeks of being listed. The house next door however, has been listed for over a month and has not had very much interest. So from this you can conclude that in 2007 we had bought near the bottom of the market, whilst now we are near the top of the market.

What you also need to remember is that different areas of a country can have different cycles, so there is not just one property cycle but many property cycles in the same country.

  • I would be highly intrigued to hear a status update in 2023! You can bet that I will be back to ask you :) – MonkeyZeus Dec 22 '15 at 16:51
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    @MonkeyZeus - well as property here is just coming to the end of a nice boom period and we have seen prices starting to level off, I would say that as interest rates start to rise over the next 12 to 36 months that we will see prices drop somewhat (10% to 20% depending on the area), some areas maybe falling even more. This makes for a great opportunity to buy more properties, which I have been planning for the last couple of years. So by 2023 or a few years after I would say I would own more properties than now and interest rates will start dropping and again and prices starting to rise again. – Victor Dec 22 '15 at 21:54
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    @MonkeyZeus - BTW when I invested in 2007/08 I had an LVR of 60% (40% equity), and since prices have more than doubled my LVR is under 30% (equity is over 70%), plus I have built up good cash reserves. So even if there was a crash (which considering the fundamentals, I don't see happening), I have a great buffer so don't have to sell in a panic. When investing you should always plan for the worst - always have a risk management strategy. I do this for my property investing and for my share investing/trading. The first rule of investing is to protect your existing capital. – Victor Dec 23 '15 at 0:08
  • Your answer makes a lot of sense. The only thing that I am confused about is how does one know how will the property go over the coming years. I mean if an area is ok now (but not in hot demand) what are the "signs" to look for that can indicate that it will go down or up in the coming period/years? – Jim Dec 28 '15 at 11:25
  • @Jim - you could look for suburbs not too far from major cities. If you find a city that is going through urban sprawl, so the population is spreading outwards, then you can find gems in areas that have not been hit by the sprawl yet but nearby suburbs have. If roads are starting to be widened and infrastructure is being built and improved, then this might be an area about to expand. But basically you want somewhere where employment is stable and growing, there are schools, parks, hospitals and shopping centres nearby. Just think of the things you want in an area you live in. – Victor Dec 28 '15 at 12:27
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As some others have pointed out, it's key to remember the difference in market value and accounting value.

To simplify things, book value is the only item that specifically depreciates... it happens in the world of accounting to try to time "when did I use a long term asset?" with "when did I obtain value from that asset?"

For a house, governments usually allow owners to claim depreciation of the building over a set period of time. This does not affect your resale value of the house.

Similarly, for a commercial property, governments set laws for how an individual or a company can time the "use" of that asset vs. their accounting. Some companies can have totally depreciated ("zero cost") assets that are still very productive.

Market Property values are derived from 3 specific sources:

  1. Value in trade (think how much could I sell for vs comparisons?)
  2. Value in use (think how much could buyer make by using asset?)
  3. Income approach (think specifically about cash flows)

Value in Trade is an estimate of the value that others would be willing to pay for a similar asset. That's why you can buy a house today, and in a "normal" market, the same house should be worth a similar amount of money in the future.

Value in Use can be more interesting... this is where a farmer can extract $100,000 in value per year from 10 acres of land. But as a region develops, a manufacturing company can generate $300,000 per year from the same 10 acres of land. The company can buy out the farmer at a 'fair' price (>$100,000 per year) and still net positive from the investment.

Income Approach tends to be focused on properties that have a cash flow, but can be adapted to other property estimates. It evaluates the current "business case" for any property with the cost of money down, the overall investment price, and the expected value from any returns.

Remember, the market value is very simply, the price you could obtain if you sold the asset at a given time. It is rarely considered in terms of "how much will this go down?".

Book value is an accounting exercise and declines by a set amount every year, because it means you can estimate the "cost" of owning an asset vs the value it generates in a particular time period.

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One reason for this is that many people don't simply allow their houses to rot and decay. If you're talking about a house built in 1980 and left vacant and unmaintained for 35 years, it probably will be in pretty poor shape.

But a homeowner generally wants to preserve their house and maintain it in good condition, so they invest in things like new roofs, siding, gutters, windows, paint, exterminators, new furnaces, hot water heaters, air conditioners, etc... All this stuff costs money (and for tax purposes, can often be factored into the cost basis of the house when it is sold), but it maintains the value of the property. A small hole in the roof may be fairly cheap to fix, but if left unrepaired, it could eventually cause much of the building to rot, making the structure near worthless. If a car slams into your living room, you don't generally leave it there; most people repair the damage.

It's not uncommon in some areas to have 100 year old houses (or 300+ year old houses in some countries) that were built well in the first place and have been well maintained in the interim.

People also renovate their homes, ripping out outdated construction and appliances and sometimes building new additions, decks, porches, etc... This also serves to make the property more attractive and increases its value.

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It's all about the land value. The structure is only ever worth as much as it would cost to build a new one (minus demolition costs)

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    That's not quite true. There's a convenience factor priced in for having the structure already built. If what you say is true, buying a plot of land, building a house on it, and selling it would never be profitable. – Zach Lipton Dec 22 '15 at 0:18
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    @ZachLipton - that can be true in some circumstances. Consider you spend $50,000 renovating and building additions on to an existing house. If you do this during a depressed market and then try to sell, you are unlikely to get anywhere near the added value as additional sales price. It is the perceived land value that also adds value to the building. When in high demand this added value can increase the price by more than $50,000, but when there is low demand your $50,000 of improvements may be mostly a waist of money. – Victor Dec 22 '15 at 1:14
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    Sure it can be true; I just mean it isn't always true. – Zach Lipton Dec 22 '15 at 1:28
  • So buying condos to let is not an investment? Is property investment only about land? – Jim Dec 27 '15 at 11:28
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    @Jim, the land produces the capital gains (or losses) and the building produces the income (especially for residential property). The building will depriciate from when it is built, and any maintenance done to the building will only slow down the rate of depreciation. If you spend $2M building a grand mansion in an area where no one wants to live, you will find it tough to resell the mansion for the $2M you spent building it. That is why trying to add value to a house in a bad area is called over capitalisation, as you won't get the money you spent on the renovations back if you sold it. – user9822 Dec 27 '15 at 22:14
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Some of the other answers mention this, but I want to highlight it with a personal anecdote.

I have a property in a mid-sized college town in the US. Its current worth about what we paid for it 9 years ago. But I don't care at all because I will likely never sell it. That house is worth about $110,000 but rents for $1500 per month. It is a good investment. If you take rental income and the increase in equity from paying down the mortgage (subtracting maintenance) the return on the down payment is very good.

I haven't mentioned the paper losses involved in depreciation as that's fairly US specific: the laws are different in other jurisdictions but for at least the first two years we showed losses while making money. So there are tax advantages as well (at least currently, those laws also change over time).

There is a large difference between investing in a property for appreciation and investing for income. Even in those categories there are niches that can vary widely: commercial vs residential, trendy, vacation/tourist areas, etc. Each has their place, but ensure that you don't confuse a truism meant for one type of real estate investing as being applicable to real estate investing in general.

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I just read this:

Housing and inflation

Adjusted for inflation the price of a house has increased a miniscule amount. A better investment would be an ETF that buys REIT stocks. You would be investing in real estate but can cash in and walk away at any time.

Here is a list of mREITs:

Stockchart of REITs

  • Very good source, therefore upvoting. However, you forgot to mention that properties pay you rent, and forgot to mention another reason for buying ETF, which is better diversification. Furthermore, the link you posted compares the properties sold one year to the properties sold a later year (which are thefore generally newer). An individual property that becomes older as time goes on probably depreciates in value over time, but the rent paid probably more than pays for this. – juhist Dec 25 '15 at 12:47
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    There are more than one property cycle in one country, even in one state. To use averages and describe all property investment as bad is generalising and wrong. But that is fine, because the more stupid people that think like this, the more opportunities there will be for smart investors. – user9822 Dec 27 '15 at 2:26
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There are many different reasons to buy property and it's important to make a distinction between commercial and residential property. Historically owning property has been part of the American dream, for multiple reasons.

But to answer your questions, value is not based on the age of the building (however it can be in a historic district). In addition the price of something and it's value may or may not be directly related for each individual buyer/owner (because that becomes subjective). Some buildings can lose there value as time passes, but the depends on multiple factors (area, condition of the building, overall economy, etc.) so it's not that easy to give a specific answer to a general question.

Before you buy property amongst many things it's important to determine why you want to buy this property (what will be it's principal use for you). That will help you determine if you should buy an old or new property, but that pales in comparison to if the property will maintain and gain in value. Also if your looking for an investment look into REIT (Real Estate Investment Trust). These can be great. Why? Because you don't actually have to carry the mortgage. Which makes that ideal for people who want to own property but not have to deal with the everyday ins-and-outs of the responsibility of ownership....like rising cost. It's important to note that the cost of purchase and cost of ownership are two different things but invariably linked when buying anything in the material strata of our world. You can find publicly traded REITs on the major stock exchanges. Hope that helps.

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Properties do in fact devaluate every year for several reasons. One of the reasons is that an old property is not the state of the art and cannot therefore compete with the newest properties, e.g. energy efficiency may be outdated. Second reason is that the property becomes older and thus it is more likely that it requires expensive repairs.

I have read somewhere that the real value depreciation of properties if left practically unmaintained (i.e. only the repairs that have to absolutely be performed are made) is about 2% per year, but do not remember the source right now. However,

  • Inflation is 2% per year, so if you leave a property practically unmaintained, you can expect its nominal value to stay about constant
  • Almost nobody leaves properties practically unmaintained. Properties are maintained and upgraded, and this adds to the value of the property, so you can expect a well-maintained property to keep not only its nominal value but also its real value. Just remember to include these additional maintenance and upgrading costs as expenses in your calculations.

Properties (or more accurately, the tenants) do pay you rent, and it is possible in some cases that rent more than pays for the possible depreciation in value. For example, you could ask whether car leasing is a poor business because cars depreciate in value. Obviously it is not, as the leasing payments more than make for the value depreciation.

However, I would not recommend properties as an investment if you have only small sums of money. The reasons are manyfold:

  • The price you need to pay for a complete property is quite large, so if you do not have that amount of money, you need to use debt leverage. In my opinion, it is generally a bad idea to use debt leverage. Instead, more riskier (and therefore more returning) assets such as stocks should be preferred. With debt leverage, there is a risk that you hold negative equity at some point of time, but no stock will turn out to have a negative value.
  • Property investments are hard to diversify. To diversify well, you should hold different sizes of properties, properties in different areas, etc. To have a well-diversified portfolio, it is generally recommended to have at least 20 different investments. Most of us do not have the money for 20 different property investments, but do have the money for 20 different stock investments.
  • The risks in investing in just only one property are huge. E.g. what do you do if the property turns out to have a mold problem? You can lose the entire value of your investment almost overnight.

So, as a summary: for large investors property investments may be a good idea because large investors have the ability to diversify. However, large investors often use debt leverage so it is a very good question why they don't simply invest in stocks with no debt leverage. For small investors, property investments do not often make sense.

If you nevertheless do property investments, remember the diversification, also in time. So, purchase different kinds of properties and purchase them in different times. Putting a million USD to properties at one point of time is very risky, because property prices can rise or fall as time goes on.

1
  1. it is the land that goes up in value, not the house that is built on it
  2. home owners are constantly making repairs and upgrades. this can make the house appear to go up in value if you ignore the money spent.
  3. real estate is not always a good investment. property values frequently plummet when the population decreases (e.g. due to the loss of a major employer or industry). in rural areas, there can be long periods of time during which there are effectively no motivated buyers.
  4. real estate is protected from inflation risk like a commodity, but can simultaneously provide value like a capital asset (in the form of rental income or living space)
  5. mortgages provide both tax breaks and leverage. they also force the homeowner to accumulate wealth in the form of equity. that can be a benefit to someone who would not normally invest regularly.
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    A large city would have more than one industry or employer, your point 3 may happen in small cities or towns but not in large cities. – user9822 Dec 23 '15 at 21:03
  • case in point: en.wikipedia.org/wiki/… – james turner Dec 23 '15 at 21:11
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    I would't call Detroit to be a large city in the USA, and I would't invest in a town that is mainly supported by one company or industry. Would you say a similar thing could happen in NY? – user9822 Dec 27 '15 at 2:21
  • i have adjusted my answer to be more vague and account for more scenarios. – james turner Jan 4 '16 at 15:14
0

Real estate is not a good investment. In fact, it's easy to make a case for it being the worst possible investment imaginable:

Imagine over a cup or coffee or a glass of wine we get to talking about investments. Then maybe one of us, let’s say you, says:

“Hey I’ve got an idea. We’re always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like?”

Well, let’s see now (pulling out our lined yellow pad), let’s make a list. To be really terrible:

  • It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
  • It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
  • It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
  • It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
  • It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
  • It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
  • It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
  • It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
  • It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
  • It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
  • It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
  • It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
  • It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
  • It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
  • It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
  • It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
  • It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.
  • For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.

-- Why Your House Is A Terrible Investment

There are plenty of good reasons to own a home, but the key word there is "home". Owning housing as an investment property is a horrible idea, and anyone who does it, especially right now with as bubbly as the market is looking again, (or, better put, still, since the last bubble never did fully pop and clear out the underlying systemic instability,) is an idiot.

And even after the current housing market bubble pops, it's likely to remain a bad idea for decades. We're never getting the early 2000s back, for basic supply-and-demand reasons: with the Baby Boom generation retiring, aging and dying off, they're not likely to do much more home-buying, and no generation after them is as big as they are, which means a glut of oversupply and weak demand for the entirety of the foreseeable future.

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    This is really just wrong. Some properties are bad investments, while others can be very good investments. That has been the case for much of human history, it is the case now, and it is almost certain to remain the case for the foreseeable future. It's also worth noting that bubbles are quite localized. Just because certain types of property are overvalued in one place doesn't mean all properties are overvalued everywhere. At least as far as the U.S. is concerned, I wouldn't be surprised if more millionaires have made most of their money with property than any other way. – reirab Dec 22 '15 at 22:04
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    Mason, you must have been burnt from buying the wrong property at the wrong time. My properties are all positively geared enough for me to live off that I am semi-retied in my mid-40s. 5% commission in and out, wow that is a lot but is it true, gee we pay no commission to buy and between 1% to 2% commission when selling. Maybe the settlement of a property is made slightly more difficult so unintelligent people like you find it too confusing to consider. Really this is a very bad answer which doesn't even attempt to answer the question. – Victor Dec 22 '15 at 22:41
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    -1, I totally agree this is a stupid answer, just a lot of rambling on from a know it all who knows very little. – user9822 Dec 22 '15 at 22:43
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    @MasonWheeler - so basically you have an opinion on something you know very little about. Really if you have no experience on a subject you should not act like you do. Sounds like an economist I know who knew nothing about investing in the real world and told everyone there was going to be a property crash so was telling everyone to sell their properties and he sold his. 5 years later the property he sold doubled in price as prices boomed. Now he explains his view as right but on the wrong side. What the hell does that mean? He couldn't even admit that he was wrong - and it cost him big time! – Victor Dec 22 '15 at 22:57
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    @MasonWheeler - that depends who you're learning from. If your learning from someone who doesn't know what they are doing and just acting on a hot tip or copying someone else who knows nothing, then you really aren't learning much except to not take hot tips and not follow blindly what others are doing. Many people fail in investing, whether it be property investing, share investing or any other investing, not because it is not a good investment but because they don't know what they are doing and just think they can take a hot tip and get rich quick. – Victor Dec 23 '15 at 0:44

protected by GS - Apologise to Monica Dec 23 '15 at 9:32

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