Agustina Bluthgen / 07/14/2021
Can Land Depreciate?
One of the main reasons you should invest in land is that land is a tangible asset. Land is touchable, palpable, and can’t disappear from one day to another. But land is also different from other tangible assets. Why? Because land does not deteriorate like buildings, furniture, machinery, etc. Land does not depreciate. Land has an indefinite useful life, which sets it apart from all other assets, both tangibles, and intangibles.
What is depreciation?
Imagine you buy a brand new car. Think about the initial feelings: the “first butt in the seat” when you get in; the fresh smell, the excitement of the first rides. Also, think about the reasons that made you buy it, to save time, save money. Then picture the moment when you start using it. You hit the road, drive to work, visit friends, take a vacation. Without noticing, the first year passed by and the car racked up several miles and one or two scratches. Additionally, a new model was launched in the market. Now your car is worth 20% less than when you bought it. A big difference, right? And during the next four years, it will continue to depreciate, at a rate of about 10% per year. An asset like a car will depreciate.
How does an asset depreciate?
With this example, we understand that the depreciation of the car is the amount of value it lost after you used it. Year after year, your car will still help you save money and time, but will also lose some of its value. Fixed assets, like the car, have a useful life, and they have a fixed end. During their useful life, they help us make our lives easier. They produce revenue and save costs. But as time passes, it needs maintenance, repairs. The car you bought will not be the same in the second year, and, most importantly, it will not last forever.
Does land depreciate?
This takes us back to land, of course, and the impossibility of its depreciation. The key here is the concept that land has an unlimited useful life. Unlike cars and other tangible assets, there is no need to divide the costs of the land into any accounting periods and, thus, it won’t depreciate. Land will not lose its value for existing or being used. If it doesn’t produce any revenues during a time, it will not produce any cost either. Also, land is limited and scarce. its value increases with time, as the law of supply and demand dictates.
With all this in mind, land is an excellent way of investment. It may take you some time to find the perfect land, it’s not an easy task. But after that, you don’t have to worry about losing its value due to depreciation, you can have it for years and years!
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