Land to Asset Ratio
In the case of a renovation, the Land to Asset Ratio at purchase could be slightly higher, as you will pay less of a premium for a dated or rundown dwelling. As you renovate you will naturally increase the dwelling value, therefore reducing the Land to Asset Ratio.
Renovators should estimate the current land value, the current dwelling value, and the estimated value of the dwelling once completed.
This will enable you to determine your expected Land to Asset Ratio, which helps avoid overcapitalisation, which is common when renovating or completing small-scale developments. It’s important to remember that you are not increasing the land value by renovating the dwelling.
Focusing on the Land to Asset Ratio can help remove or reduce emotion biases and attachments to the superficial or changeable aspects of the property, often the interior of the dwelling such as the kitchen, bathroom, flooring or wallpaper.
Thinking about the Land to Asset Ratio often leads to a logical question – should investors just purchase a block of land?
The answer is usually no, because vacant land generates no rental income and the debt is not tax-deductible because the asset is not an income-earning investment. Furthermore, the scarcity factor that helps drive up land values is usually lacking, and spare land is rarely available in highly sought-after locations.
- Large land size
- A high land value per square metre
- An older dwelling
A high land value per square metre is better to focus on as it is more likely to occur in highly sought after locations. This often means that the land size can be a lot smaller, while still purchasing a property with a high Land to Asset Ratio.
Visualise a standard home on 300 square metres vs 600 square metres. The property with less land, but in a superior location, can have the same Land to Asset Ratio as one in a poorer location with twice as much land.
In superior locations (which is regularly closer to the CBD’s) you have more established suburbs, and therefore, a higher percentage of older dwellings and period homes.
In these situations, you are more likely to have a superior Land to Asset Ratio than a newly completed property because the new property is yet to complete its depreciation phase.
– By David Johnston, Founder and Managing Director of Property Planning Australia, and Co-host of the mini-series ‘The Property Planner, Buyer and Professor’ which is currently on the Mentor List Podcast.
David’s company educates and empowers professionals to create their own personalised Property Plan, select property like an a-grade buyers agent, property education, mortgage strategy, mortgage broking, money management and risk management. He passionately believes in fiercely independent advice and the company provides what he calls ‘pure planning’ and this is reflected in the fact they are the only property advisory firm to earn no fees from buying or selling property, or selling any investment, insurance or super products.
Do you want to know more about:
- Developing your own Property Plan
- Selecting A-grade properties yourself
- Strategic Mortgage Broking
- Money Management
This is where Land to Asset Ratio becomes interesting. As a property investment advisor, I generally limit the L-AR to 50%.
If the house on the same block was then totally renovated to a desirable quality, the purchase price would be substantially more, and the L-AR could be closer to 70%.
However, if the house was brand new, we’d simply add the construction cost plus builder margin to the land value and the L-AR would most likely fall below 50%.
– By Cate Bakos, Co-host of the mini-series ‘The Property Planner, Buyer and Professor’ which is currently on the Mentor List Podcast.
Specialising in investment property selection and assisting home buyers with a pragmatic edge to what is otherwise a very emotive task, Cate’s passion and rigour has aided over one thousand property buyers to date.
Her regular blogs, media contributions and her book “Successful Property Investment” are a testament to the fact that Cate’s commitment to her industry is unstoppable
Winning 2018’s #1 National Buyer’s Agent of the Year Award marked a high watermark for Cate. She is also a co-host of the mini-series ‘The Property Planner, Buyer and Professor’ which is currently on the Mentor List Podcast.
And yet we know that many property investments have continued to underwhelm. When reviewing property portfolios there’s often an under performing asset, and the explanations nearly always lead back to a low Land to Asset Ratio.
In recent years we’ve lived through a paradigm shift towards the construction of high-rise towers, often targeted at landlord buyers and frequently to non-resident investors. In many cases the land value component of each individual new unit might just be a few per cent of the asset value, with the rest comprising land remediation costs, expensive construction techniques, marketing and sales expenses, and the developer’s handsome profit margin.
As too many investors are now finding out the resale price of new high-rise apartments can initially fall, and then remain stagnant for years. Of course, the supply and demand for the location and property type are key (reductio ad absurdum vacant land in remote locations has a high Land to Asset Ratio, but demand is low, and the rental returns non-existent).
Over the medium-to-longer term rising land values do the bulk of the heavy lifting for you as a real estate investor, which is where precision property planning and accurate asset selection becomes so vital.
And always remember to think Land to Asset Ratio.
Pete walks the talk when it comes to investing, and he gratefully parked his career in accountancy, having achieved financial independence at the age of 33, as detailed in his best-selling first book, Get a Financial Grip: a simple plan for financial freedom.
Pete is uniquely positioned to comment on housing markets as the co-founder of an active property buyer’s agency with offices in Sydney, Brisbane, and London, combined with his unparalleled ability to deliver powerful, data-driven market analysis.
Ph: 1300 896 045
Camberwell VIC 3123
Ph: 1300 896 045
Surry Hills NSW 2010