18/05/2015
Forget nice houses, kids. Instead, look what’s underneath. What you’re really investing in is land. A house always devalues, but the land is what increases.
That’s the golden rule of investing.
Land appreciates. It goes up in value. It’s an appreciating asset.
Buildings depreciate. They decrease in value over time. They’re depreciating assets.
Australian tax law says a building has a life of 40 years, after which it theoretically needs to be replaced. Let that sink in and never forget it. Wealth comes from land. The only purpose of a building is to gather rent to help you cover land holding costs.
Now let’s talk about buying property for long-term growth. I’d class a long-term investment as a property that grows in value for 150 years plus. That’s because I’m not investing for myself anymore, I’m doing it for my kids.
This is why apartments are always bad investments. I’m talking wicked witch bad!
Apartments are a flashy investment. There’s something cool about the thought of owning one. I should say that I build hundreds of apartments each year. But they don’t meet my long term criteria. Even if apartment prices rose faster than medium density housing (25–80 homes per hectare), I still wouldn’t buy one. Because I know that in 40 years it’s going to be a slum. The building will age and sell below market value so a developer like me can profit by knocking it down and building again.
If you buy an apartment, think how much land you get with your purchase. Divide the size of the land by the number of apartments. You don’t end up owning much land, which is why there’s so little potential for long-term appreciation.
That’s why I buy medium-density housing that continues to grow in value over the long term. Even if you eventually have to replace the house you still have a sound investment.
People talk about land content ratio (LCR), but don’t worry too much about this calculation. If you’re buying a house (or even a unit or townhouse) on a reasonably sized block for a suburb, it can still be a worthy investment. I strongly advise you to keep clear of small units with low land content, as these are virtually apartments.
Here’s a rule of thumb to guide your decisions. The total floor area of all buildings needs to be less than the land.
In other words, the LCR must exceed 1:1 (i.e. 100%).
Example 1: LCR of a standard home.
House = 200 m2
Land = 400 m2
LCR = 2:1 or 200%.
This is good; the land is double the building size.
Example 2: LCR of a standard apartment.
Apartment building = 10,000 m2
Land = 1,000 m2
LCR = 1:10 or 10%.
This is bad; the land is only a small fraction of the building size.
An old house that needs knocking down may sell with up to 100% of the price comprised of land.
Let’s think about supply and demand. When demand exceeds supply, there are more buyers than suitable properties. This pressure on supply raises prices.
When supply exceeds demand, there are more properties than buyers in the market. Prices stagnate or fall until buyers are enticed back into the market. With apartments, developers can just keep stacking them higher so it can be harder to get real pressure on supply.
That’s why I say steer clear of city centres. As a rule, medium density housing with good land content always outperforms apartments.
Don’t get hung up on these numbers. Just stay away from apartments and you’ll be fine.
Never forget the golden rule:
Land appreciates, buildings depreciate.
If you like apartments, rent one!
Dad’s tips
• Land appreciates, buildings depreciate
• The total floor area of all buildings needs to be less than the land
• Wealth comes from land only. The only purpose of a building is to gather rent
• Don’t buy apartments or small units with minimal land content
Cameron McLellanDirector of OpenCorp, Cam McLellan is committed to sharing his passion and property investment knowledge with everyday Australians.
After thriving in the telecommunications, technology and recruitment sectors and making the BRW Fast Starters list twice and the Fast 100 list three times in 8 years, alongside accomplished OpenCorp entrepreneur and brother-in-law Allister Lewison, founded OpenCorp eight years ago.
Cam started investing in real estate at a young age and quickly mastered the art of building sustainable wealth. He has used the same wealth building strategy to develop a multi-million dollar business, sharing his knowledge and skill with ordinary Australians. Cam has personally bought, sold and developed numerous properties and has an extensive residential and commercial investment portfolio.
