With land having that characteristic, should an investor consider vacant land as a part of his investment property portfolio? We will consider that matter in this article.
There are a multitude of things to consider in property investment. In considering ongoing costs and income tax, depreciation makes a big difference. Things are wearing out, reducing in value and costing money to maintain. In contrast to the depreciation of the building, plant and equipment, the appreciation of the value of the land itself is doing the opposite. It is growing in value.
Land as a property investment
Essentially with investment property you are purchasing land for the growth in its value and the buildings on that land for the income that they generate.
Purchasing vacant land as an investment can be done, but it has limitations and problems. With regard to limitations, you will find it difficult to get a loan for more than one vacant block of land at a time, and generally the lender will require that you also own a property with a home on it. As to problems, unless that land has agricultural use or is next door to a mining site, it’s not going to generate income for you. It will still, however, have plenty of expenses. Giving up the potential for the property to “pay for itself” is a significant loss of opportunity, not to mention the dollars going out of your pocket.
With regard to what happens to the value of the buildings on your property, we have to say that they generally depreciate over time, but they can also become like a vintage motor car. Old cars have been restored which today are worth many times more than their original value. The same is true with houses. However, keep in mind that the only way they retained that value long term was by sinking a lot of money into them over time.
Short term it is possible for the buildings to maintain their value if the price of new construction is increasing more rapidly than depreciation. In outer suburban areas people will always have the choice of building a new place or buying an existing one. When the prices of new homes shoot through the roof, prices of existing homes are lifted. By the same token, when developers are climbing all over each other offering special deals, the market value of existing homes in the area will be suppressed.
An entirely different dynamic takes place in inner suburban areas. In those places, building on a vacant block hardly ever happens unless it’s a knock down – rebuild. That’s an expensive exercise. With the very limited supply of land, it’s like gold. Given that it’s so difficult to build something new, very old, classic homes have incredible value compared to what it cost to build them last century. Their value is lifted by the extreme cost (and possibly council limitations) involved in replacing them with something new.
Loans for property investment
If you are contemplating an involvement in property investment, give the friendly credit managers at State Custodians Mortgage Company a call. They are very experienced in providing the finances for such an investment and will be very helpful to you. Call today on 13 72 62.