Over time large lots tend to appreciate faster. In real estate one of the cardinal rules is that generally land increases in value and general structures decrease in value. Why does a structure tend to decrease in value? As a structure gets older it tends to get farther away from safety codes. But generally properties tend to increase in value because the rate at which the land appreciates outpaces the rate at which the structure is decreasing in value. When you are hoping to sell your property for more in a few years its best to look at the dirt and not the house.
Because land tends to appreciate I usually prefer properties that have more of the current value in the land than in the structure. This means that a property in a new subdivision where the structure account for 70% of the value and the land is 10% of the value is not appealing. For instance properties close to a city center can have 65 to 70 percent of the value is in the land. Of course what is even more appealing is a centrally located 5 acre lot with say a 500 square foot house. I saw one a few months ago in the Austin MLS that was pretty appealing.
Lets run the numbers on a few scenarios to see what I am talking about. Lets assume that land appreciates at 7 percent a year and structures depreciate at 2 percent a year.
First let us look at a property where 70% of the value is in the structure.
| Year | Structure Value | Land Value | Total Value |
| 0 | 70 | 30 | 100 |
| 1 | 67.2 | 32.4 | 99.6 |
| 2 | 64.512 | 34.992 | 99.504 |
| 3 | 61.931 | 37.791 | 99.722 |
| 4 | 59.454 | 40.815 | 100.269 |
| 5 | 57.076 | 44.080 | 101.156 |
What we see is that the total value actually decreases for the first few years until the land value increases enough that it starts to play a bigger role in the equation.
Lets compare that to where the property accounts for 90% of the value
| Year | Structure Value | Land Value | Total Value |
| 0 | 10 | 90 | 100 |
| 1 | 9.6 | 97.2 | 106.8 |
| 2 | 9.216 | 104.976 | 114.192 |
| 3 | 8.847 | 113.374 | 122.22 |
| 4 | 8.493 | 122.444 | 130.938 |
| 5 | 8.154 | 132.240 | 140.393 |
In the end the differences between these two properties is pretty significant. What I find surprising is that alot of buyers that are concerned about appreciation will buy a house on a small lot on the far outskirts of the city. They look at the upgraded countertops and other amenities as a sign that they will see significant appreciation. What they don’t realize is that alot of these features that are currently in vogue might not be popular in a few years.
I want to be clear I am not saying everyone should buy a property where land value accounts for most of a properties value. In many cases people enjoy nice amenities that come with a house and the idea of living in an older home holds little to no appeal. But if your primary concern is investment when you are evaluating a potential property you should pay more attention to the lot than the house.
Ki is a realtor working in the Austin Texas Real Estate market. If you are looking for properties in Austin they provide information on their Austin Real Estate Blog along with offering visitors a free Austin MLS search.
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