What are the two types of physical depreciation in real estate?
The Two Types of Physical Depreciation in Real Estate
In real estate, physical depreciation is generally categorized into two types:
- Curable Depreciation: This type refers to the physical deterioration that can be fixed or cured economically. It's often associated with normal wear and tear that can be repaired, replaced, or restored. Examples include painting, repairing broken fixtures, or replacing old carpets. The cost of curing these issues is typically less than the increase in property value once the repairs are made.
- Incurable Depreciation: This type of depreciation refers to physical deterioration that is not economically feasible to correct. These are generally major issues that would cost more to fix than the value they would add to the property. Examples include an outdated layout, poor architectural design, or extensive structural damage. Incurable depreciation often occurs in older buildings where the cost of repairs or updates is prohibitive compared to the building’s overall value.
How Are Curable and Incurable Depreciation Used in Real Estate?
In real estate, the terms "curable" and "incurable" depreciation are used primarily in the context of property valuation and maintenance strategies. Here's how they are applied:
CRE Property Valuation and Appraisal
- When a property is being appraised, the appraiser will assess both curable and incurable depreciation to estimate the property's market value.
- Curable depreciation is often seen as a short-term cost. Appraisers will estimate the cost of necessary repairs and subtract this from the potential market value.
- Incurable depreciation affects the long-term value of the property. Appraisers consider how these factors (like an outdated design) will limit the maximum achievable market value.
Property Maintenance and Renovation Decisions
- Property owners and managers use these terms to prioritize maintenance and renovation efforts.
- Addressing curable depreciation is often a priority because these repairs or upgrades can significantly enhance the property’s value and appeal.
- Incurable depreciation requires a more strategic approach. Owners must decide whether to invest in extensive renovations, adjust the property's usage, or even consider demolition and redevelopment, especially if the cost of addressing these issues outweighs the benefits.
Real Estate Investment Analysis
- Investors analyze curable and incurable depreciation to determine the potential return on investment. Properties with primarily curable depreciation might be attractive as they can be improved relatively easily for a higher resale value or rental income.
- Properties with significant incurable depreciation might be less desirable unless they are available at a substantially lower price, offering other advantages, or if the investor has specific plans to overcome these challenges (like redevelopment).
Marketing and Sales
- In real estate sales, understanding these types of depreciation helps in marketing properties. Properties with mainly curable depreciation can be marketed as "fixer-uppers" or as having great potential for improvement.
- For properties with incurable depreciation, sales strategies might focus on other strengths of the property, like location or land value.
The concepts of curable and incurable depreciation important in real estate, from assessing and improving property values to making informed investment and marketing decisions.