Land Appreciates, Houses Depreciate. Or do they?

“Land appreciates, houses depreciate” is a ‘golden rule’ statement that is commonly quoted by investors. But this school of thought  only serves to limit the scope quite dramatically when looking at potential properties to invest in, hence excluding a large amount of investment opportunities on the market. So why don’t we all invest in a few acres of land and sit back and watch our portfolio grow? Why would we even consider an inner suburban apartment or townhouse that will certainly depreciate like a car or computer?

 What is certain is that simple laws and rules, albeit useful, do not completely govern the successful property investor. Instead, he/she should be flexible, with an open and knowledgeable mind. Knowledge and research should be the compass and opportunities the map points that guide the investor’s ship to its destination. Otherwise, he may risk sailing the seas of real estate in a slow and lost manner, even potentially sinking their investment portfolio in the perilous sea of the property market.

So how can we avoid this?

First, we should consider correcting the ‘golden rule’, to a more flexible statement to help adjust our mindset. Lindy Lear of Your Investment Property magazine suggests a slight rectification: “Land Appreciates. Houses are Depreciable.”

Nothing changes with land and it still appreciates with time, but it means that the building and its contents are depreciable, which can be a good thing for investors. “You can claim tax benefits on this depreciation,” explains Lindy, “and the newer the property the more the tax benefits and the longer they last (up to 40 years).”

Due to an apartment or townhouse having less land content, you may find their returns through tax claims on their depreciation far outweighing the returns that the growing value of land ownership may return.

Second, we should research local zoning laws and what aspects of a redevelopment may require permits, if it is permitted at all. If your projected figures on a land investment rely on the construction and subdivision of the land, you may want to reconsider in areas that heavily restrict what can be done with the property.

Third, we should consider lifestyle attributes like cafés, parks, and easy access to jobs. The rise of a knowledge-based economy has created demand for inner city and suburban homes within walking or public transport means of their cities CBD. Traffic is getting worse in Australia’s major city CBD’s and along with the costs associated with owning a car, the ability to get a round on foot or by public transport becomes highly valued. The supply and demand for these areas may also outweigh the benefits of purchasing a block of land further out.

Overall, supply and demand should be a strong dictator of your decision when purchasing and that although “land appreciates, houses depreciate” is a nice mantra to follow, it excludes far too many opportunities for the smart investor.

If you have enquiries, call the Hicks Real Estate team today on: 07 3355 6845.