What happens to each over time?
When a new industrial building is built the two main costs are obviously the land itself and the total cost of the building. These costs vary considerably, particularly the land cost, which is based on location or by demand.
The land component of the total project cost may be under 35%, or over 60%, of the total cost. For the purposes of this exercise let’s assume the respective cost of the land and the building is each 50%.
Over time the value of the land goes up and the value of the buildings depreciates. So the land value over time grows as a greater percentage of the total realizable value of the whole property. At some point, say 40 years, the building adds little or no value to the total realizable value of the property as a whole.
Some astute property investors understand that an older building bought at a land value (with a tenant who still can use these premises and is happy to pay an income stream over a lease period) is the best investment, for the following reasons
- You cannot buy cheaper than land value, the value is intrinsic in the land and it does not depreciate(in the long term), whereas buildings do depreciate over time and often down to nil value.
- A property at land value will immediately benefit from any land market value increase, a newer property may not go up at all (in this example), the value just becomes a greater part of the total realizable figure, not an increased figure in total.
- This type of property by its very nature is ripe for redevelopment. It is the best of both worlds, either get the income stream or redevelop.
Some investors prefer new beautiful buildings, however, long term, the size of your land will determine its ultimate value.
A home is a very good example of the same principles, the bigger the parcel of land your home sits on, normally the greater the future long-term value potential.
by Atholl Williams in Latest News
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