When purchasing a property, it is important to not only understand the value of the property but also the value of the land component. When purchasing a property it is comprised of a dwelling and a land component. The land component of an investment property is what truly drives capital growth. While the building structure of a property is decreasing in value over time. This is because the building is physically in nature and therefore progressively deteriorates in its quality over time. A similar comparison can be likened to a new car, the car is paid for at a premium and over time (in most cases) loses its value as the car has various wear and tear. Calculating the land value allows the buyer to determine what ratio of land (asset) and dwelling (liability) is being purchased.
Why is it important to know the value of the land?
The land value gives the investor the data needed to calculate a metric known as the land to asset value. This metric is measured as a percentage out of one hundred which illustrates the value of the land component of a particular property. For example, a property may be purchased at 500k with the land being valued at 250k. This would mean the land to asset ratio is 50%. Now, this measurement may not be at the forefront of investors’ search criteria, but it does help during asset selection.
In many cases, investors may look to purchase a property with the highest land to asset ratio. This is to ensure the majority of the purchase price is derived from the value of the land. Why is this relevant? If the purchase price is high and the land value is low, it will generally mean the purchase price is majorly comprised of the dwelling. As an investor, you want to get the most value for the purchase price. Therefore purchasing a property with a higher land value component will give the investor more assets and less liability.
So how is the land valuation calculated?
It can be quite simple to determine the value of the land by using the state’s land valuation calculator. Each state has a website that can be used in order to show the value of the land of a particular property. The following steps are usually a pretty accurate guide to determining the value:
- Search for state land valuation
- Enter the website for whichever state you are searching.
- Use their service function to enter your property address.
- Select ‘Perform Search’.
- Your land valuation and property information will be displayed.
Each website for each state is slightly different but generally, it is a similar process across all states. All land is subject to change over time as the valuation appreciates or depreciates. The land is usually valued in clusters meaning properties in the same area usually have the same valuation. Using this number, the investor can identify the land to asset ratio of a property.
Identifying the value of a property is essential to ensure you aren’t overpaying for a property and getting the best value in the market. Being able to identify the value of the land of a property will help the investor determine the breakdown of a property and if they might be paying a premium for the deteriorating dwelling or purchasing an asset with a premium land component. Utilising the land-to-asset ratio may be an additional metric an investor incorporates into their due diligence in order to ensure they get the best value for money as the power is in the land.