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This episode is a business coaching course that provides the definition of depreciation.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Definition Magician: Depreciation - the loss of utility and value of a property.
  • Lesson Nugget: In real estate, you can write off the depreciation of value of an asset for your taxes even if that asset is appreciating in market value.

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[MUSIC PLAYING]

-We're live here in sunny San Diego joined with my main man Michael on Thrive15.com, an alternative to Lynda.com . There is no real estate topic too obscure Burer, and we are talking about depreciation. Now depreciation is a topic that a lot of people ask about. We've had a lot of Thrivers, actually, ask, how do you determine your depreciation? What is my depreciation? What is that word even mean? And so, we're going to get into it here. So I'm going to read the definition and then he's going to provide with an ample example that my mind can handle so that you and I can understand it better. So here we go. Depreciation-- loss of utility and value of a property. What does this mean?

-It's pretty simple. So it's the decline in value over time, usually due to either the assets deteriorated or it's the functionality of it has declined. So if you think of your car. You bought it for a certain price and next year new model comes out. It's got new bells and whistles. Your car is worth less because there's a newer, more improved product on the market.

-Often, though, in real estate-- and so it often is involved when you're talking about your taxes because you can deduct the depreciation in your taxes for real estate investments. So even though for tax purposes you're marking down the value of the building every year, it could be appreciating in actual terms. The value could be getting worth more. Even though you're depreciating it, you're reducing that cost for tax purposes.

-Now, real estate's one of the only things that I know that you just can bet on it appreciating much more than other assets. I mean, it's one of those things where if you buy a building and it's not in a bad area of town, usually it'll just appreciate year after year after year.

-Maybe.

-Maybe?

-That's the hope. It's always a lot of factors.

-This is the layman's perspective. Talk to me from a commercial real estate background perspective why that is just hoo-hah, why you can't just say that.

-Every asset class can go up and down over time to a lot of factors.

-Have you see a major, major building that just drop in value, depreciate radically? Have you seen this happen?

-Sure. The market value absolutely changed dramatically.

-Walk me through what kind of things could affect that. An example you have in your mind. What would be an example where a property is pristine, it's in great shape-- it's still in great shape a year later, but it's worth 20% less.

-Well, sometimes it's due to factors unique to the building. So it was occupied, it had a full 100% occupancy, all the tenants in the building, and the tenants move out, and then it's worth less. You could have a building that next door maybe an undesirable use is created. So you have a nightclub going next to an office building. That may make it less desirable. Or it could just be broader factors in the economy that make the real estate worth less.

-You lived in San Diego right at the recession. Right when the recession was just hammering. Did it affect San Diego's valuation of properties pretty heavily?

-Sure. So at the end of the day an asset is only worth what someone will pay you.

-Were there buildings that lost half their value in San Diego?

-Sure. Absolutely.

-And has it rebounded now almost?

-Yeah.

-Really? But you watched it go all the way. You watched it just free fall. What does that do in your world when, at that time-- can you walk me through? When people who are investing in real estate and they see their assets depreciating, do they know that the real estate cycle is up and down enough to where they're kind of calm, or is it a little bit like, oh, no? I mean, how does that go? How does that feel?

-There's a lot of fear. That's what often creates the decline in value. When there's just total fear in the market people don't want to participate, and less participants usually mean a falling market.

-OK. Well, Michael, I appreciate you talking about this term of depreciation and really getting into the nuances of it. And. I was trying to think of a way-- how do I describe how much I appreciate you? How do I do it? Well, I'll take an hour or two and come up with something, and so hour two minutes seven I came up with this. I appreciate you in the same way that chefs appreciate nonstick Teflon pants.

-Well said. Well said. Boom.

-Boom.

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