- Jeremy SheppardParticipant@jeremydsrdataJoin Date: 2015Post Count: 0
Everyone knows that land appreciates while buildings depreciate. So, how can investors best apply that intel?
Some buy houses instead of units. Some buy houses on big blocks. Some professionals suggest you should aim for a larger than average block size.
I’ve even read one blog, where the apparent expert claimed to have discovered the ideal ratio of land size to house size. And guess what, they just happened to be selling some stock that matched this precise ratio. What are the chances!
But it’s not about square metres (sqm). It’s about…
It’s a measure of how much of your invested dollars have gone toward acquiring an appreciating asset (land) vs a depreciating one (building). Obviously, we want a higher LAR to maximise capital growth.
Picture 2 properties:
Property A worth $500k at year zero:
- $200k land
- $300k building
- LAR = 40%
Property B worth $500k at year zero:
- $300k land
- $200k building
- LAR = 60%
Now imagine the following happens to BOTH properties:
- Land appreciation = 10% pa
- Building depreciation = 2% pa
We would then have…
Property A at Year 1:
- $220k land
- $294k building
- $514k total
- Growth = 2.8% ($14k)
Property B at Year 1:
- $330k land
- $196k building
- $526k total
- Growth = 5.2% ($26k).
The capital growth is almost double for just a 20% difference between their LARs.
Note that a 40-year old unit worth $800k will have a high LAR despite not having much in the way of sqm.