What determines the value of a property investment?
There are many aesthetically pleasing factors that could improve the perception of house value – whether the place has a Jacuzzi or if the kitchen has recently been renovated – but as a property investor, it’s important to know what really creates the value in the investment and how to determine whether yours will be a high- or low-return investment.
The age-old real estate adage about location, location, location rings true, but not so much for the actual building; rather for the land it stands on. The house structure will depreciate over time, but it’s important to remember that while the global population increases, land space becomes an important and rare commodity because no one is creating any more of it. Because of the demand for land, existing land appreciates in value.
There are a few determining factors when it comes to which property will appreciate and how.
Smaller houses tend to provide a better return on investment
If two pieces of land in the same area appreciate at a similar rate, compare how a bigger, more expensive house would appreciate (let’s say by 10%) compared to the appreciation of a smaller, less expensive house (appreciating by 20% at the same rate).
Sub-areas within neighbourhoods will impact land values
If a neighbourhood is intersected by a busy road, yet on the outskirts of the neighbourhood is a cul-de-sac, the properties in the cul-de-sac will be better valued than those close to the busy roads, considering the quiet, calm cul-de-sac is safer for children and the isolation increases security.
Intended future development in an area will impact property values
It’s important for investors to be aware of any intended private or government development planned for the area. If there is vacant land nearby, perhaps there are municipal plans to build new schools, a hospital, and other public structures – which will affect land value – or private development of large clusters, etc.
If you’re unsure of which investments to make based on house value, rather purchase vacant land and wait until there is increased demand for it before selling it off at a profit or in sectional titles.