Real Estate

Land-To-Asset-Ratio and a Real Life Case Study

June 27, 2019
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What’s up guys!

Hope everyone’s having a great week.

Up and down kinda week here at TheFrugalSamurai HQ… Up because PapaFrugalSamurai aka my Uncle’s brother has returned back from a 3 month soiree in the Motherland.

Down because well, there’s still a few personal issues afoot.

But enough about me – for today we are discussing:

Land-To-Asset-Ratio

I’ve actually only stumbled onto this concept recently and wished I had understood this when I first started my investment journey into real estate.

Image result for desert
We have the land, but where are the assets?

What is it?

The most basic explanation is the “land value” component for a property compared to its overall value.

For example, if a property value is $500,000 and the land value is worth $250,000 – then the land-to-asset ratio is 50%.

So what?

Whoa, just trying to help here.

Ahem, anyway – knowing the land-to-asset ratio is KEY because, as the saying goes “land appreciates and buildings depreciate”.

This means that in the long-run, property price growth is typically from rising land values.

Easy for you to say.

Gee, so confrontational today.

I’m just going to interpret that you asked me how to calculate it.

The simplest method I can think of is to hop onto a real estate portal and find out what vacant blocks of land are worth in the locale you are interested in.

Image result for mordor
“Be careful Sam, I heard the landlord here is a right old Bastard.”

Simply divide the asking price by the square metres of the block to work out the price per square metre.

Although be aware that different pockets in different streets have different $/sqm.

Alternatively the local government council has assigned land values for each individual property taken from the valuer-general, it’s how they calculate land tax… but that’s not easy to find information.

That’s nice.

Um yeah. So anyway, a general rule of thumb is about 70% of the property should compose of land value, noting that land is appreciating.

If you can find a higher land value than the asking price, then shortlist that sucker asap.

And of course, there are the even rarer ones whereby land value is greater than the asking price – in which case… BUYBUYBUYBUYBUY.

But wait! Keep in mind that usually the buildings themselves are either about to fall down (which needs renovation/demolition) or very, very old.

Put your money where your mouth is.

Geeeee… VERY touchy today…

OK so here’s a good example of one which I saw recently in Perth, Western Australia (real estate property link here).

For those of you who think I am an Eastern European Cyber scammer and did not click on the link (funny story about them I’ll share another day), let me just show it to you.

Image result for 1/17 Baldwin Street Como WA 6152

The first thing you’ll notice is that…HEY, I’m saddened and disappointed you don’t trust me!

Anyway, the first thing you’ll notice is that the pictures of the property seems to show a block of units sitting on a fair piece of land.

And you’d be right, because it is indeed 4 units on 1,089 sqm, which works out to be around 272 sqm per unit.

So?

So next we work out what the price per square metre of the suburb roughly is.

By going on the real estate portals, we calculate that the asking price per sqm is between $968 – $1,711 and the average sitting at $1,278.

We take this figure and multiply by the 272 sqm for the unit we identified and we get a figure of $347,616.

And?

Yeah exactly, so what right?

BUT we can see that it’s recently been sold, and sold for a mere $262,000 (sold link here).

Even if we take the lower range of $968, that still gives the land value component at $263,296.

A very astute purchase in my opinion and should see the owner reap future gains.

Why didn’t you buy it then?

To be fair, I was monitoring it for a LONG time, pretty much when it first came on the market.

Image result for dirt
From little things big things grow.

It ticked many of the boxes I was looking for but unfortunately the zoning of the property sat just outside a council development plan – which meant that the land use is limited without any future zoning changes.

What does the above paragraph mean?

Well it means that… you know, I think I’ll just save it for a future post on zoning.

Why?

Because you’ve been nothing but mean to me whilst I pour out pure GOLD, that’s why.

And look, I think this is an important concept which investors might sometimes miss. I know I certainly wasn’t aware of this in my earlier purchases – and have paid handsomely for this mistake.

Although be aware that all investing has upsides and downsides, the downsides of high land-to-asset ratios are the higher purchase costs as they typically are in older, more established areas.

Also the building which sits on the land (the income generator) is usually older and requires more maintenance and upkeep as well.

You could of course just buy a vacant block… and let it sit there. But without any income and higher holding costs, why would you?

Hm. Okay.

I’m hoping that there’s SOME value (haha get it, ah I make myself laugh) which you got out of this post today.

Certainly it can help us all in our investing journey ahead.

And finally, remember that no factor should be taken in isolation, always look at the whole picture when making a decision.

Good luck!

What do you think? Did you enjoy this post? Please help me out if you enjoyed this and put your email in and click on the little “subscribe” button at the top right. This way, you’ll never miss my words of awesomeness! So do the right thing, be a subscriber and get it straight to your inbox fresh out of the oven!

P.S. MrsFrugalSamurai read this post and said that I should be looking to promote myself more as a consultant of sorts… I’ve thought about this and yeah, why not! Happy to share my knowledge if it makes sense! So let me know if you have any questions or wanna just shoot the breeze at info@thefrugalsamurai.com

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