This is a key concept to be aware of if creating wealth through property investing is your goal.

Capital Growth comes from the appreciation of land. This is because land, in well selected areas is a commodity that is in limited supply and always in demand. Buildings, however, actually lose value over time because the physical materials deteriorate and the appeal of their style and function diminishes over time. Even the taxation department deems that over a 40-year lifespan the house will depreciate in value and theoretically be worth nothing.

Essentially, the purpose of the dwelling is to provide rental income to support the holding cost of your appreciating asset. Now this doesn’t mean you don’t want to own a quality, appealing dwelling on your parcel of land as this will obviously maximise your cash flow, (Another key concept in building wealth through property investing) it does mean you must understand the value of the land.

It is important to understand that more isn’t always better. The biggest block of land that you can afford my not be the most valuable. Land is valued at a different rate per square meter depending on its location. Therefore, you don’t want to base your buying decision on where you get the largest quantity of land for your money. Instead, you want to focus on buying where you can afford a good portion of land in an area in strong demand. This portion of land should make up the majority of the property’s value. This is referred to as land-to-asset ratio.

This is one reason why it is best to steer clear of shiny new high rise apartments. Not only are you paying a premium for a shiny new property (think a new car on the showroom floor) that is going to drop in value once it is ‘second hand’, but the land component that you actually own after its been split up between all of the other apartments is generally very small.

This doesn’t mean that units or other strata titled properties are a bad idea. As mentioned before, the value of the land is a critical consideration. a 100sqm portion of land in an in-demand suburb close to a CBD could be far more valuable than a 1000sqm land in the back of a regional area. Further to this, we still have to consider the investors personal situation, including budget, cash flow requirements etc, which could mean that a quality, in demand strata titled property is actually the best purchase for the investor.

Being conscious of the fact that it’s the land component of the property that is actually driving capital growth will help you to make smarter investment decisions when It comes time to purchasing and asset.