How Important is Land? Something that few investors give adequate consideration to, if they did they would never buy a single apartment in a complex but instead buy the entire complex and the land it stands on.
“Who am I?
I am the basis of all wealth, the heritage of the wise, the thrifty and the prudent.
I am the poor man’s joy and comfort, the rich man’s prize, the right hand of capital, the silent partner of many thousands of successful men and women. I am the solace of the widow, the comfort of old age, the cornerstone of security against misfortune and want. I am handed down to children through generations, as a thing of great wealth.
I am the choicest fruit of toil; credit respects me, yet I am humble. I stand before every man bidding him to know me for what I am, and possess me.
I grow and increase in value through countless days. Though I seem dormant, my worth increases, never failing, never ceasing. Time is my aid and population heaps up my gain. Fire and the elements I defy, for they cannot destroy me
My possessors learn to believe in me; invariably they become envied. While all things wither and decay, I survive. The centuries find me younger, increasing in my strength.
I am the foundation of banks, the producer of food and the basis of all worth throughout the world.
Yet I am so common that thousands unthinking and unknowing, pass me by.” Anonymous
What do you think I am? Have you guessed yet?
The answer is: Land.
Land appreciates in value; buildings don’t. However much you fall in love with a building, however low maintenance it is, however much rent you can charge and however many deductions you can claim, the building will depreciate in value over time.
This is why so many investors get their fingers burnt with new units or townhouses. The land content of their investment may be only 10% of the purchase price, 90% of which is therefore a depreciating asset. This is the best-kept secret of the real estate industry – because what developer is going to tell you about it, when he can sell 20 units instead of a single house or duplex on the same block of land?
There are really only two reasons why you would lose money in real estate.
> The first one is greed and,
> Second is not doing your homework
Unfortunately those two things catch out about 95% of the ‘punters’.
Don’t be a Gambler.
Greedy investors are usually locked into ‘get rich quick’ thinking and they shoot themselves in the foot all the time. As an investor you also need to avoid being manipulated by the greed of others. That is why doing your homework is so important.
Real Estate is an ever-changing market – and while buildings are its prime product it is the land that is the true limited commodity. People repeatedly make the mistake of paying a premium for a building – which in itself is commonplace and replaceable.
It all has to do with supply and demand. Land is a commodity, which is obviously limited in supply, and for which demand is continually growing, as our population increases. “Bricks and Mortar” are pegged to inflation and labour costs, so their price does go up – but they are not, as yet, in limited supply: buildings are pulled down (sometimes they fall down!) and are easily replaced.
Unfortunately it does not make sense to just buy land. You need a vehicle for generating income to service the debt and the best vehicle for this is a rental property. But knowing that the land is the appreciating component, you need to acquire rental properties with the highest possible proportion of land content.
You will always find people who advise you to buy units. They will tell you not to buy land or big blocks because you will incur land tax, tenants don’t like mowing lawns and its just easier to find tenants for units than for houses.
Look behind the cloak. Developers make a healthy profit from selling a number of units with nominal land value.
Is it any wonder that they forget to mention that it is the land that appreciates??