Can you depreciate a NNN property?
Each of us roughly understands the meaning of the word “depreciation.” The depreciation strategy was widely used in the years of perestroika: in those days, the heads of the largest industries, without any hesitation, wrote off complex and expensive equipment and masked shadow incomes. It was the amortization of funds that made such frauds possible.
Definition and purpose
In the traditional sense, depreciation is the gradual transfer of the value of the company’s funds and its intangible assets to the final cost of the product produced.
Depreciation is needed so that the capital of the company (more precisely, its value), regardless of the state of the assets included in it, remains unchanged. Depreciation funds are formed at the expense of financial deductions, with the help of which worn-out objects are restored, which, in turn, form the company’s fixed assets.
In other words, depreciation is the surest way to preserve the financial and other assets of a company within its limits. Depreciation is a small percentage of the cost of fixed assets that are subject to wear and tear. These resources include, in particular:
The total cost of providing the production process consists of many indicators, among which are the above deductions. They cannot but influence the final price of the goods, which consists of the margin and the cost.
How exactly do depreciation allowances work?
Let’s consider this question on the example of the equipment acquired by the management of the enterprise. It doesn’t matter how much it costs. It is important that the term of its use is limited to 5 years. Thus, every month for five years from the date of purchase of equipment, a certain percentage of its value is transferred to the depreciation fund. This percentage is determined by the nominal value of depreciation, inflation and other factors. After 5 years, the company can sell the equipment at its residual value. And with the money taken from the sinking fund, it can buy a new one. The volume of this fund consists of the final price of the equipment (for which it is sold at the end of the operational period) and interest payments deducted at the end of each month.
Of course, you have a question: Can you depreciate NNN property? Yes, you can.
Many say that investing in real estate is almost the only worthy type of investment. Allegedly, real estate always only rises in price – and this makes investing in real estate an almost risk-free investment. In fact, investment in real estate is one of the types of investments, which, along with others, also have their own specifics and have both positive and negative sides.
One of the features of investing in real estate is the need to have a relatively large initial capital in order to engage in this type of investment. So, suppose you have only two or three thousand dollars. In that case, you can safely put them in the bank, buy several shares of investment funds, or find many more options for increasing them – however, investing in real estate is most likely not among these possible options.
However, in the modern real estate market, there are various mechanisms that make real estate investment more accessible for a small investor. In particular, we can talk about investing at an early stage of the construction of a building. It is clear that the cost of the apartment after the completion of the construction of the house most likely will increase significantly compared to the amount that the investor had to pay for it earlier.
In addition, there is such a thing as a mortgage and other types of purchase of housing in installments. We are talking about long-term loans, with the conditions of which the investor can familiarize himself with almost any commercial bank. And finally, we should not forget that the concept of “real estate” means not only a super-expensive apartment in an elite metropolitan new building but also covers some other meanings. So, a fairly promising type of real estate transaction is the construction and subsequent sale of garages. The cost of such investments in real estate is an order of magnitude lower than in the case of apartments, and the yield can be much higher.
Moreover, suppose you ask about the prices of apartments and garages and compare them with the monthly fee charged by their owners in case of renting out an apartment/garage. In that case, you will most likely find that the ratio of rent to the market value of the garage will be higher than the same ratio in the case of an apartment. Suppose an investor invests a certain amount in the construction/purchase of garages for subsequent renting out. In that case, he will most likely pay back his investment much faster than if he invested it in the purchase of an apartment (at market value) for the same purposes. Although, of course, one should take into account the specifics of a particular region, supply/demand and many other market realities.
Another specific feature of real estate investments is the relatively low liquidity of this investment instrument. Those. if the investor does not exclude the option in which he may urgently need to release his funds, then such an investor should not invest in real estate.
A nice feature of investing in real estate is the ability to receive income from this investment, regardless of market trends in its value. It’s about renting out. In this case, even when the investor sees a temporary decline in the value of his property, he can at least partially compensate for the loss due to the rental fees charged to the tenants.
Investments in real estate are also subject to all sorts of “surprises” associated with sudden changes in the value of assets. However, in the case of real estate, as a rule (this does not mean “always”), it is easier to predict the emerging trend in its value than in the case of many other types of investment instruments (for example, foreign exchange, precious metals or company stocks). The fact is that there are a number of fairly stable external and internal factors that almost completely determine the market value of the real estate.