The real value in property
I had the pleasure the other day to be the guest lecturer at Anglia Ruskin University in Chelmsford. It was the final lecture of the final year for students in the Building Surveying Degree.
One of the questions that came up during the presentation was ‘Where's the real value in property?'
The true value in your property
I explained that most people think that ‘bricks and mortar' are the real investment when buying property, but that isn't exactly the case. You see if you look at the actual investment you'll soon realise that over time buildings (‘bricks and mortar') depreciate. Sure it will take around 200 years for concrete to deteriorate, wood will last several hundred if treated correctly and various other materials will last longer or shorter periods depending, but rest assured the materials that go into making your building will, over time, disintegrate. It's actually said that if the earth were left for around 10,000 years their would be very little evidence of humans ever existing on the planet.
So if the building depreciates – Where is the real value?
The true value is the land. It's always been in the land while building materials and wages generally keep to inflation growth figures the land can sky-rocket depending on where the land is. If it's Chelsea in London the demand is much greater than say, Siberia (sorry if you live there). The land is more valuable simply because of the supply and demand factors affecting the land. Interestingly enough if you cross the bridge to Battersea, prices drop profoundly, again because of the supply and demand mix.
So if the land is where the value is, why don't we all just buy land?
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The problem with land
The problem with buying land is that we need to borrow money to buy lots of it and to borrow money we have to be able to prove that we can pay the loan back. With no building on the land, you have very little chance of creating an income sufficient to fund the debt and therefore we cannot borrow against the land.
The solution is simple. We put a building on the land that we can rent out and create an income from. With this income, we can borrow money against the property. Hey presto!!! We have a working business and investment model. One that has been used for thousands of years.
The most important principle in property investment.
The underlying and fundamental principle of property investment is that we have a tenant who pays us rent and this rent can then supplement the mortgage payment we are required to make. So as long as the tenant pays the rent each month, our working model for investing works very well.
So the real value in a property is in the land but you need the building to get a tenant who will pay the rent and allow you to pay the mortgage.
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