land value vs. building value

Discussion in 'Investment Strategy' started by roots73, 20th Nov, 2016.

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  1. roots73

    roots73 Well-Known Member

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    Greetings PCers,
    I'm fairly new to the PI game and been reading through this highly informative and, at times, entertaining forum, thank you for your wealth of knowledge! This is my first post, so please be nice ;-)

    The topic is land value vs building value of a property
    (this may have been covered in another thread but I couldn't find it):
    Once all other DD has been completed and the fundamentals of a property look good along with decent yield & CG balance (based on your strategy), do you look at the land value in relation to the building value?

    Eg. if a property is for sale at 350k, the land value is 280k, and the house looks like its definitely worth more than 70k, would that be a decisive factor for you? Or is the rental return / growth potential etc more important?

    Thanks, Roots.
     
  2. wombat777

    wombat777 Well-Known Member

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    I look for a combination - location or other characteristics that are conducive to capital growth as well as a rental yield that enables me to hold it without a negative impact to my back pocket.

    I also look at the future potential to add value to the property. Potential that will increase profits from a sale or potential that will increase yield and cashflow. For the later, think of it as turbo-charging the ability of the property to generate passive income.

    You might go for a lower-yielding property if you think there are genuine prospects of capital growth in the short to medium term. The downside is that you have a negative cashflow whilst you hold it when yields are too low.
     
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  3. roots73

    roots73 Well-Known Member

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    Thanks Wombat777!
     
  4. dabbler

    dabbler Well-Known Member

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    Buildings are like cars, when new they cost what they do, after one occupant, no longer new, and then as years go past, they decline.

    Depending on location, the building can be worth more, or less, depending on the land costs in that area.
     
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  5. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    Hi @roots73, welcome and congratulations on the first post!

    Regarding land vs building, there is no evidence to suggest that properties with greater (or less) land component increase in value any quicker over time than the other. Ultimately, when the time comes to sell, you don't place two "For Sale" signs out the front.

    Focus on the right dwelling style for the location. That is, keep in mind what the local demographic is, do they want houses with land? Or are they a younger demographic (or older down-sizer demographic) who don't want the big house and land and would prefer a smaller block or possibly an apartment? Understanding this, in line with the overall fundamentals of property markets will provide a much better result over time than trying to determine if a property has an extra 10 or 15% of building vs land component.

    Good luck and enjoy the journey!
     
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  6. Big Will

    Big Will Well-Known Member

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    Land is the thing that appreciates, where as the building depreciates.

    If the building is new you cannot improve on new without destroying capital.

    So having a higher land content will have a greater chance of increase than one with a very small land content.

    However the land will only increase if there is demand for it. E.g. having 10,000 acres in middle of Australia will not increase a great deal as there is little demand compared to 500m2 in 5km from Sydney CBD, as there is a huge demand.

    Land can also increase in value by zoning changes - e.g. Low density to medium density. As now the land is more valuable due to what can be done with the land.

    If you had a house on 500m2 and the exact same house next door on 1,000m2 the house on 1,000m2 will be worth more and would likely have greater capital gains as the land is going to be more valuable because you can do more with it. E.g. build a house at the back or knock down and develop it (depending on zoning), another option is to sell the land off at 2x500m2 or more if zoning allowed it.

    However if one house was 500m2 and the house next door was 550m2 there is not a great difference in price as both pieces of land have roughly the same content.
     
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  7. roots73

    roots73 Well-Known Member

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    Thanks very much for the insights!
     
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  8. New2prop

    New2prop Well-Known Member

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    For a given property how do you work out the land value?
     
  9. wylie

    wylie Moderator Staff Member

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    I look at the UCV and then look at what vacant land nearby has sold for. This isn't easy in many older areas because vacant land is not easy to find.
     
  10. roots73

    roots73 Well-Known Member

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    I use RP Data for that info, although at times the valuation can be out of date...

    I guess another the reason I asked was the fact that, in certain cases, within the same city, only a few kilometers apart, you can find two properties for a similar purchase/sold price but vastly different land values...still trying to get my head around all those things ;-)
     

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