How one property investment rule can limit your return
Land Appreciates and Houses Depreciate’ is a ‘golden rule” statement often quoted by investors and property experts alike.
So, if you are an investor who believes this rule how does it change your thinking when looking for an investment property?
Does this thought process limit you to certain types of properties and perhaps exclude you from looking at all investment opportunities out in the market?
Often, potential investors only want to look at houses, not apartments or townhouses because of this “golden rule”.
The premise for “land appreciates” as I understand it is that the intrinsic value of a property is based more on the land component, more so than on the building.
So, the conclusion most people would come to is that the bigger the land value, the better the property is as an investment.
And maybe the other conclusion would be that buying apartments and townhouses with low land value is not as good an investment.
The premise for the “house 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 component.
So, there must be other factors we need to consider. Perhaps we should change the statement. Then it might make more sense.
Land Appreciates and Houses are Depreciable.
Does this now change our thinking about selecting a good investment property?
Firstly, it means that land cannot be depreciated. It is only buildings that can be depreciated. This is a good thing for investors, because it means that the building and its contents are depreciable.
You can claim tax benefits on this depreciation, and the newer the property the more the tax benefits and the longer they last.
This can significantly improve the cashflow of your property. The better the cashflow the lower your holding costs on that property, the more properties you can add to your portfolio.
It is also important to note that as apartments and townhouses have less land component per unit, so for the same purchase price, an apartment or townhouse will have a higher potential depreciation, giving more tax benefits and better cashflow as well.
When you realise that apartments and townhouses can be 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.
Example: If you as an investor had $600,000 budget, which would you choose? – an affordable apartment closer to the CBD of a capital city or a house with land in a fringe area 40 kms from capital city centre.
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It is the location and demand for the inner-city apartment that is driving the growth and the rental yields, and the lack of land content is not a factor. Which investment would you prefer to add to your portfolio?
When researching for property to buy, if you believe that it’s all about houses and the land, 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 investment rules, instead look to buy a property that will have long term rental demand with capital growth potential.
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This article via Your Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.