The basic rule when buying an investment property, you must always consider location, location, location.
When investing in property, you must also realise that land appreciates and buildings depreciate.
There are generous tax incentives to invest in property. The government recognises the importance of community investment and housing projects and being aware that buildings depreciate the tax system permits claims for depreciation on investment properties.
The government provides an allowance to depreciate items such as carpets and window coverings. You can also depreciate building structural elements for more modern buildings. However, the government only allows you to depreciate the buildings and not the land you’ve purchased.
House & Land vs Unit
When buying property, investors often consider purchasing a home and land package side by side with investing in a unit in a big complex. Both properties are worthy investments and may generate the same total returns over the long term. But the type of return capital growth, regular income or tax benefits can be very different. You will not get the same capital growth buying a unit as purchasing a single home on land in a good location. The land is a scarce resource, and there are impacts on property prices. Land can’t be moved, and each plot has its own positives and negatives.
Demand and Supply
The price of land is determined by supply and demand. If there is a high demand, but only little is available, prices increase. Waterfront land in major cities is very scarce, and there is a high demand for it. So, the waterfront property prices continued to rise. However, if the government puts all the available waterfront public land up for sale, the supply of waterfront properties would increase, reducing the prices of other waterfront properties.
Although this isn’t likely to happen, it is an excellent example of how increasing the supply in the market can change the value. Unlike land, buildings are a fixed resource. You can build a replica property on almost any plot of land. In fact, thousands of people choose to build a home like a display home. Many people live in identical houses. It’s only where they are located that’s different.
In the short term, the value of land and buildings can differ from the market value. This occurs when many people are looking for the same type of dwelling, but only a few are available. In this case, the prices may be higher than the actual value, as there was a high demand and short supply. However, developers will build more of that type of property in the longer term, increasing the supply. The property will then reflect the underlying land and appreciated building value.
Some properties will gain added value from architectural design or how the property is finished. In the case of an older property such as in the Victorian style, there may be a high demand but little supply as the building can no longer be replicated due to the contemporary tradesperson’s types of building materials or skills. In this case, the building’s value is more than just the land.
When purchasing an investment property, you must consider your financial and tax objectives. If you are after cash flow from a high rental return and high tax depreciation benefits, purchasing a unit could be suitable. However, if you were after higher capital growth and less additional income, then a single house on a piece of land would be a more appropriate choice.