Myth Busters: Land appreciations and property depreciates
Land appreciates and houses depreciate’ is a ‘golden rule’ statement often quoted by investors and experts in the property market. If I had a dollar for every time I have read or heard that statement I would be very happy with the increase in my cash flow!
So if you are an investor who believes this rule how does it change your thinking when looking for an investment property? Does it limit you to certain types of properties and perhaps exclude you looking at all the investment opportunities that are out there in the market? I commonly hear from potential investors that they only want to look at houses, not apartments or townhouses because of this ‘golden rule’.
Tackling the 'Golden Rule' of Property Investment
The premise for ‘land appreciates’ is that the intrinsic value of a property is based more on the land content than on the building. So the conclusion most people would come to is that the larger the land content, the more profitable the long term investment. Using this logic we should all go out and buy acreage property no matter the location. By this same logic apartment and townhouses with low land content are relatively poor investments.
The premise for the ‘houses depreciates’ is that the value of the house goes down over time, just like a car or a computer, making it a bad investment. Of course this is not fact.
Houses appreciate in value over time. Apartments and townhouses appreciate in value over time. Investing in property is all about buying a property that will appreciate in value over time and deliver capital growth and good returns. It is not about just investing in one particular type of property such as houses because of the land content.
So there must be other factors we need to consider. Perhaps we should change the statement. Then it might make more sense.
Land appreciates. Houses are depreciable
Does this now change our thinking about selecting a good investment property?
Firstly it means that land cannot depreciate. It is only buildings that can depreciate. This is a good thing for investors as it means you can claim tax benefits on this depreciation, and the newer the property the more the tax benefits and the longer they last (up to 40 years).
This can significantly improve the cash flow of your property. The better the cash flow the lower your holding costs on that property, the more properties you can add to your portfolio.
Secondly as apartments and townhouses have less land content, then for the same purchase price, an apartment or townhouse will have a higher potential depreciation, giving more tax benefits and better cash flow as well. When investors realise that apartments and townhouses are often more affordable, then they become very attractive as an investment option.
If we accept that land appreciates, then we need to find out why it appreciates in value. It is not all about the size of the land. It is more about the property and the demand in any particular area or location. To put it in a nutshell, it is all about supply and demand. If you as an investor can buy property that everyone wants and there is not enough available you have a great potential growth asset.
Choose properties based on the current market not 'The Golden Rule'
For example, an investor has $400,000 to spend and the choice is – an apartment closer to the CBD of a capital city close to transport links or a house with land content in a fringe area of a capital city with no transport links. It is the location and demand for a property that will drive capital growth and the rental yields, not the land content. Which investment would you prefer to add to your portfolio?
When researching for property to buy, if you stick to the premise it is all about houses and the land content, you may be missing out on some great opportunities. You are trying to buy the best affordable property, in the best potential location with all the best drivers for growth, the best rents and the most amount of tenant demand. It could be a house, it could be an apartment, a duplex, a villa or a townhouse.
Don’t limit yourself by outdated “golden rules”. The market has changed, you may need to change with it.
If you are interested in getting more property investment tips and advice from professionals in the industry, contact us and we will give you the latest, most relevant information.
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