People often ask me what makes a better investment, a house or an apartment.
I believe there is an even better question you should be asking to ensure you make the best decision.
The question is…
“Which has the better land value?”
Here are my thoughts…
Understand the Basics
Ask yourself, which part of the property will go up in value?
The answer of course is the land, because the actual property itself will depreciate or lose value.
So it makes sense that whatever your budget, you need to ensure the bulk of the purchase price is made up of as much land as possible.
This may be much easier to work out with a house as opposed to an apartment, but it is still very much applicable.
For a house you can easily use a nearby comparable land sale, we often tend to use the rateable land value here in Queensland.
For houses up this way, we are generally looking for a minimum of around 70 – 80% Land to Asset ratio.
Therefore, 70 – 80% of the purchase price is made up of land.
Not only does this ensure superior growth, but it is also a good tool to recession proof your portfolio, as land is considerably less volatile.
The same applies for apartments in most cases.
We will take the total land or site value and divide it by the number of apartments in the complex.
Yes, it may be an apartment, but the land / site still has a value that will increase in the right locations.
It the majority of courses, it will fairly obviously be the house, but remember, not all land is equal.
A client came to us many years ago with a budget of only $350,000; they wanted to buy a house as it had more land.
The proposal they were looking at was a new house and land package about 25-30km from Brisbane.
The Rateable land value was $75,000; this represented a Land to Asset Ratio of around 21.4%.
The other portion would have been represented by build costs, other commissions and fees that developers usually charge.
Alternately, we were able show them an apartment only 5km from Brisbane in a small boutique complex of only four.
The Rateable land value for the site here was $1million, so each apartment had an intrinsic land value of $250,000.
The Land to Asset ratio here is 73.5% and the land value has kept rising.
There is a clear difference in the land value of these two assets, even though the price is the same.
Case Study 2
Another client came to me many years ago and was assessing one of these brand new Inner City apartments in the Brisbane CBD.
It was nice, shiny and new with 2 bedrooms, 2 bathrooms with all the bells and whistles including pool, sauna and spa.
They were asking $650,000.
Applying the same formula, I looked at the site value and the amount of Apartments in the complex.
Being central Brisbane the site was worth $10million, but there were 100 apartments in the complex.
That bought the Land value down to only $100,000 and a Land to Asset Ratio of only 15%.
In the end, we ended up buying them an old river front apartment with extensive views of the city.
It was older, with 2 bedrooms but only 1 bath and didn’t have all the bells and whistles
We ended up paying $656,000.
This was a much smaller site worth $5million, but there were only 10 other apartments in the complex.
With a Land value of $500,000, this bought the Land to Asset ratio up to 76.2% – a stark contrast!
I know what you are thinking, that is just the intrinsic value and it is not the actual land value.
Well 6 years later, a developer has just knocked on their door and offered all the owners $11million to buy them out.
Many people get confused when choosing between a house and an apartment.
The best piece of advice I would give is to get an understanding of what the Land to Asset Ratio is.
On most occasions, the house will come out on top.
However, remember, it is not the size of the land you should consider but the value.
Apartments in small boutique complexes offer great alternatives to houses located along way from things like employment hubs, public transport, schools and entertainment precincts.
Many smaller boutique complexes are on underutilised pieces of land ad that will get rarer and more scarce as times goes on.
It may represent an ideal opportunity for a developer who will be looking at the land and thinking what may be possible.
Otherwise, it will continue to be in higher demand and grow significantly faster in value to boost your wealth.
When doing your research in the future, dig a little deeper and remember the Land to Asset formula.
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