Depreciation: Auto and Real Estate

    Depreciation can be defined as the decrease in an object’s value over a period of time. This lower value of an object, product or an asset may have many causes. One of the basic cause is the wearing out of an asset over a period of time. Another cause of depreciation is the result of the advances in science and technology that lead to the asset or product obsolescence. Other than land, most if not all products and assets go through depreciation. The methods for depreciation are usually either in the form of straight line depreciation or declining balance depreciation. These forms of depreciation are more evident in auto, properties, and equipment.

   Auto depreciation is one of the most noticeable forms of depreciation. In a car or vehicle depreciation, the overall useful life of the car is calculated through annual depreciation based on car make, model, and mileage. The longer the duration of the car being driven on the road and increase the total mileage, the higher the depreciation expense. Even if the car sits in the garage mint in condition, it still depreciates as a result of advances in science an technology leading to new advanced vehicles. The condition of the vehicle also affects the depreciation value of the vehicle. Most vehicles involved in accidents usually have a higher depreciation and insurance coverage even when restored to the brand new condition by auto dealers. Other factors like maintenance of the vehicle, safety, aesthetics as well as custom additions to the vehicle might contribute to or bring down the value of depreciation. For example, reupholstered leather car seats in a used vehicle will bring down the depreciation expense and increase the new vehicle value. Depreciation is proven to be the largest ownership cost over time. Auto depreciation is calculated in the form of straight line depreciation. To calculate the auto depreciation expense, one must know the residual or salvage value of the vehicle at the end of its useful life as well as the total useful life of the vehicle. This salvage value is subtracted from its original cost price and then divided by its total useful life. If calculating depreciation through mileage, the original cost, depreciation factor per mile, as well as the total mileage was driven, are all considered. Many vehicles with longer useful life have more mileage on them with less depreciation expense. This depreciation factor also affects the retail price of the vehicle whether new or used as well as Insurance coverage. Though some antique vehicles (preserved) retain high value as consumer demand increases, road cars, in general, depreciate value even though the customer demand for that vehicle might be increasing. These antique cars are usually a topic for road shows, car racing, television shows etc which means they are less driven on the road but more on display. Vehicles in general also depreciate value as a result of corrosion. Door frames, power windows, and doors, hood latch, License plate bolts, trunk, auto parts are all subject to corrosion. Hence, cars especially racing cars are often fitted in with anti-corrosive parts. Strong permanent odors in a vehicle as a result of low maintenance and aging interiors can also be a result of depreciated car value. This is especially true of used cars. For example, a used car with a strong odor in mats or upholstery may bring the value of the vehicle significantly down. A strong odor usually means the car interior has to be treated with chemicals as well as re-upholstered preferably with leather seats hence the retail vehicle value of that used car is diminished. Irregular oil changes and low maintenance leading to engine abuse also contribute to car depreciation.  Hence, auto depreciation is a major depreciation expense and ownership cost.

   Property depreciation is resulting due to a number of factors. Some of the factors when considering real estate values are “Sustainable Sites, Water Efficiency, Energy and Atmosphere, Materials and resources, Indoor environmental quality, design innovations and regional priority (1).” Selecting sites that increase pollution with construction activity or sites that are inappropriate for development lead to property depreciation. Property constructed on soil with poor surface drainage qualities will result in basement and foundation floods which not only bring down the value of the property but severely risk damage and casualties. Buildings and structures built on low load bearing soil capacity and soil shearing strength mean there is limited room for structure expansion and hence lead to structure depreciation. Buildings and structures with limited availability of “utilities: water mains, sanitary and storm sewers, gas lines, electrical power lines, telephone and cable lines as well as fire hydrants” (1) all lead to structure depreciation. Limited access to public roadways and transit stops also lead to structure depreciation. Buildings and sites that are inefficient in acquiring and using energy also lead to property depreciation. Heating cooling and lighting of structures that lead to inefficient energy consumption and use translate into high utility and maintenance bills. For example, duct cleaning, as well as heat and hydro bills that increase over a period of time with property’s age, will lead to property depreciation.   Poor indoor air and light ventilation quality and improperly installed thermal comfort systems like spray foam insulation that lead to hazardous strong odor and high replacement costs for lumber and other building materials lead to property depreciation.  Usually, properties whether the residential or commercial increase in value due to high demand. This demand grows as the accessibility to amenities like school, colleges, hospitals and shopping centers gets better. The growth of population and development of the area increase the real estate value. Renovating the property also increases the real estate market value of the property. However, faulty construction, maintenance or renovation blunders may also lead to decrease in the value of the property. For example, a property constructed on loose foundation or sinkholes will lead to a depreciation of the property as it slowly develops cracks and decay. Many properties that exist on sinkholes often lose all their value as no investor is going to risk his investment and life on a property that will eventually sink beneath the ground surface! When properties are constructed without caissons and proper building materials on land prone to earthquakes, they lose their value over a period of time. The depreciation expense, in this case, is usually directly related to the amount of damage done by natural disasters as well as the overall condition of the property. Retaining walls example concrete retaining walls at basement level constructed to reduce soil lateral pressure may or may not depreciate property value based on soil quality and structure load. Construction that does not follow changed fire and safety codes may impose lawsuits and depreciate property value.  Improper ventilated roofs and crawl spaces also add to the depreciation of the property. Since “the ventilation of concealed roof and crawl spaces is required to remove moisture, control condensation” as well as reduce fungus and strong odors, depreciation occurs if these conditions are not met! The Absence of windbreaks in areas with high wind velocity and less privacy reduce property value.  In tornado-prone areas, “the structure, components, and cladding of a building must be anchored to resist wind-induced overturning, uplift and sliding”(1). Though accessibility to airports and roads increase the real estate value, noise from airports or highways near to a property will depreciate the value of the property as the population and noise level increase. Inaccessible parking spaces on a structure or unavailability of parking spaces for vehicles used by persons with disabilities may depreciate structure or building value even more. Hence, property depreciation result due to many factors.

   In conclusion, many reasons contribute to depreciation of auto and real estate. However proper maintenance of vehicles, anti-corrosive parts and other vehicle modifications will reduce depreciation and retain car value for auto trader market. Regular waxing and car paint upgrade will generally retain the shine of a used vehicle. Regular vacuuming and using air-fresheners  on interior vehicle mats and seats usually help fight bad odors and so on. It also means car seats do not need to be reupholstered again and again either as a result of blade cuts or cigarette ash. Fluid maintenance is another key factor to vehicle maintenance. Maintenance using regular oil change, engine fluid, coolant liquids and windshield wiper liquid is often regarded as a key factor in reducing engine and car depreciation. Many avoid buying vehicles involved in a collision due to their diminished value and high insurance. But if one is to buy a  restored vehicle from a collision, auto experts recommend buying insurance policies that cover the entire value of the vehicle rather than couple grand less. Vehicle parts modification and adding an emblems made of precious metals might also increase the value of the vehicle depending on the precious metal charts in stock market. Using apps and notes on vehicle mileage and maintenance may also reduce car depreciation. In terms of property value, waterproofing properties start with selecting sites with low slope elevations. Landscaping property perimeters with gravel and drains may reduce chances of basement flooding and retain real estate value. “Sheet piling” near concrete retaining walls at basement level may also help in stopping basement floods. “Resistance to lateral wind or earthquake forces requires the use of shear walls, diagonal bracing or rigid framing with moment resisting connections”(1). Exterior masonry walls if any “must be weather resistant and control heat flow. Water penetration must be controlled through the use of tooled joints, cavity spaces, flashing and caulking” (1). Construction that follows new building codes and fire safety codes is less likely to create legal issues and diminish value of a property that might need complete reconstruction otherwise. Interior design also plays a key role. Designing floor plans according to the growing consumer market and market trends increase real estate value. For example, floor plans that have walk-in basements are more friendly to person’s with disabilities. Staircase railings that may be used for chair lifts by person’s with disabilities may also increase real estate value. Wide staircases that allow easy moving of furniture, appliances, and equipment without wall and property damage may increase real estate value. Laminate and hardwood flooring that reflect wall paint may be a positive factor to consider in renovation. Wall paints and primer with fireproof coatings for wall, ceilings and outdoor deck may reduce fire flammability from barbecues, kitchen appliances, iron press or even cigarettes. Washrooms with bidets installed during renovations may increase property value as they are sewage/drain friendly as well as accommodate person’s with disabilities. Properly installed high quality curtains that prevent the need of replacement due to elevation faults will avoid wall scars as well as repaint jobs which in turn will maintain property value. Secured towel rod hangers and other types of wall hangers prevent wall damage as they come off. Security systems and smoke alarms in basement also increase property value due to decreased chances of fire and burglary. Concrete lawns and backyards which saves time on lawn mowing and gardening may increase property value based on consumer demand. Overall, depreciation is and will be a major concern in both auto and real estate market. Knowledge could be a good startup point for combating depreciation.

(1) – Francis D.K. Ching. “Building Construction Illustrated”. 2014. Published by Wiley.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s