Appreciation is a bonus, not a given

Appreciation is a bonus, not a given

This is part of a series that is being posted to my website because blogs read backwards and this item needs to read forward. You may read everything published to-date at http://www.segrestrealty.com Hit the “Investment Guidelines” link.

For my lifetime (I’m 62), there has been an increase in the price of real estate almost every year. In the years where there was a tiny slide backwards the steady progress resumed to give an overall upward trend. In the long term, even though it will start from a lower level this trend will probably continue. The increases may just track inflation though. Supply is still higher than demand and construction still continues. Households are being consolidated, reducing demand.

When calculating IRR a “reversion” (sales proceeds) is always added to the last years projected cash flow. It is quite rare to see a reversion number used that is lower than the purchase price. That could become the new reality. Think about an empty freestanding retail store. Many of these building are expensive types of construction. The additional costs is factored into the rent. When the original lease is up, a new tenant may not need a building that is designed to another company’s model. The building may even have functional or style obsolescence. The value of the property at that time is land value minus the cost of tearing down the building.

We know that the retail, office and industrial uses are changing rapidly because of the internet and outsourcing. How can we be sure that the buildings we have will still be useful? I really don’t think we can. Cost recovery allowed by the IRS is 39 years. Perhaps we should consider that a building will actually be worthless at the end of that time and plan accordingly. If the building is still useful, we get a bonus. If not, we are prepared.

David Segrest is a REALTOR® in Charlotte NC. His website is http://www.segrestrealty.com His email is david@segrestrealty.com He is also a contributor on Argentina to: http://realestatebloginternational.com/