If you’re investing in real estate for the long term, there are two words you need to understand: depreciation and inflation.
These two concepts can have a major impact on your investment over the course of time, especially when you’re thinking about owning a property for 10, 20, or even more years.
Understanding Depreciation
When we talk about depreciation, we’re not just talking about the tax concept. We’re also talking about what naturally happens to a building over time.
Properties require money every year just to maintain their current condition. Furnaces need replaced. Rooms need updated. Roofs eventually need repaired. Things wear out.
As a property owner, you need to plan for those expenses and put money back into your buildings. The goal is to keep your properties maintained so they don’t lose value simply because they have been neglected.
There can also be tax benefits associated with depreciation, depending on your situation, which is something investors should discuss with their tax professional.
And Then There’s Inflation
While depreciation represents the ongoing wear and maintenance needs of a property, inflation can work differently for a long-term real estate investor.
Over time, the purchasing power of a dollar generally decreases. As the cost of goods, services, labor and construction increases, the value of real estate can increase as well.
That’s one reason real estate is often viewed as a long-term investment. A property that is worth
$100,000 today may be worth significantly more years from now—not simply because the building changed, but because the value of money and the overall market changed.
Taking Care of Your Investment
The key is understanding how these two ideas work together.
You can’t simply buy a property, collect rent and ignore it for 20 years. You need to continue putting capital back into the building to maintain it and keep it competitive.
That might mean replacing a furnace, updating a room, improving common areas or taking care of problems before they become bigger expenses.
By maintaining your property, you’re positioning the building to benefit from long-term changes in the real estate market and the economy.
Think Long Term
At Redwood Prime Realty, we believe real estate investing is about creating wealth over time and understanding the value of the asset you own.
There’s a difference between investing for the long term and speculating for a quick return. Long-term investors need to understand their properties, plan for expenses and consistently manage their assets.
Depreciation is happening. Inflation is happening. The question is whether you’re managing your property well enough to take advantage of the long-term opportunity.
