I look at buying a place as buying a place to live, not as an investment. I’m trying to convince myself that some level of depreciation of a piece of property is acceptable to still break even on the property when it comes time to sell it.
Let’s say that you plan on staying in a property that you might purchase for about 7 years.
Let’s assume that your monthly fixed expenses, ignoring mortgage pre-payments, are the same whether you rent or buy a place.
Let’s also assume that you can and will pay off the mortgage in entirety in this time, costing you a total of $35,000 in interest.
If your rent goes up at a rate of 2% per year, then you would pay approximately $132,000 in rent payments during this 7 year period.
In order to break even on the value of this property versus what you would have spent in rent payments over the course of the 7 year period, the following must be satisfied:
Rent you would have paid >= Mortgage interest paid + Property Depreciation
Solving for property depreciation:
Property Depreciation <= Rent you would have paid – Mortgage interest paid
In our example, this gives:
Property Depreciation <= $132,000 – $35,000
Property Depreciation <= $97,000
Which means that for this particular property and the amount of rent that I am paying in my current apartment, the property could depreciate $97,000 or about 1/3 of its current value before renting for that 7 year period would have made more sense.