The depreciation ratio of lower priced property
Property investors are always suprised to learn that lower priced property often has a higher depreciatin ratio in relation to the purchase price than more expensive property. Why?
The 3 main reasons are:
Wet Areas. Kitchens, bathrooms and laundries are the most expensive ares of a property to build on a per square metre basis. Every household, whether you live in a 4 bedroom house or a 1 bedroom apartment you will need to have a kitchen, bathroom and laundry.As you increase the number of bedrooms (which are cheaper to build) the construction cost, as a ratio, decreases.
White Goods. Ovens, dishwashers, rangehoods and clothes dryers depreciate at a faster rate than brickword and concrete. It's better to have an item depreciating at 20% per annum as opposed to depreciating at the building allowance rate of 2.5% per annum.
Land Value. As the price of the land increases the house or construction costs decreases. There is only so much building you can physically put on a block of land. At the lower end of the market house and land packages can have the ratio of construction cost to purchase price roughly 50/50. On more expensive property this is much harder to do. Not only does land value affect the depreciation ratio but as we wrote about in the previous article it also impacts rental yield.
To read this article in full click here.