Land vs. Improvement Values
Successful real estate investing takes a lot of careful thought and research. How can you predict just how much your property is going to be worth in future years?
Here are a few important things to consider in order to distinguish between the factors that are going to appreciate versus those that will depreciate over time, and how you can maximize the value of your property.
First, let’s talk about the physical structure itself, or the “improvement”. Any improvement, if left alone, will depreciate over time, thus reducing the value of the land. This happens because it wears down, goes out of style, or loses functionality. Property owners must dedicate some amount of capital to maintaining their improvements if they wish for them to hold their value.
Land, on the other hand, actually appreciates as time goes by. Why? It all comes down to supply and demand. Supply is limited + demand (in this case, population) is growing = price increases.
Parcels of land in specific areas will grow in value at a rapid rate, simply because certain areas are more desirable to live in than others. For example, beach areas are notorious for having expensive properties, regardless of the condition of any improvements – Why? Simple answer, location!
Don’t be fooled by trendy or lavish buildings, thinking that those traits will be the most valuable portion of your property. (Although they certainly don’t hurt!) When looking for an investment purchase, it’s about returns – not appearances. Improvements will always cost you money to maintain, but the land beneath your structure is the profitable portion.
Understanding the present value of your property and future value of the land is going to be your ticket to becoming a successful investor. Don’t judge a property by its improvement – you can always remodel or rebuild later. In today’s market, it’s all about location, location, location!
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