By: Stephen Cook
For the last few years, most places in the country
have been experiencing tremendous appreciation in the
values of real estate. For the longest time I talked
about how my house went up in value and, daily, I hear
many others talk about how their homes have appreciated
Well, I have news for you, houses do not appreciate
in value. Yes, you heard me correctly. Houses do not
appreciate in value. You probably think I’m crazy, but
let me explain.
At the moment, I happen to live in one of the hottest
real estate markets in the entire country. While there
are many people out there clamoring for deals, I’m passing
on deals. While others think the market is drying up,
I’m still finding more investing real estate opportunities
than I want to deal with. How can this be, you ask?
The difference between myself and many other investors
is that I understand appreciation. I realize that houses
do not go up in value. It is the land that the home
is sitting on that appreciates, not the house itself.
The house itself actually goes down in value. It will
maintain value if you keep it up, but otherwise it goes
down in value and it costs money to maintain.
So in a hot market, I’m looking for land. I don’t care
if there is a house on it or not, I’m looking for land.
Land in good areas is like gold in investing real estate
opportunities. A home will have a piece of land that
someone will want. That person may or may not keep the
house, but the real estate it sits on is the desired
asset. Because land appreciates, it is a desired commodity
in a hot market.
Here is an example of how appreciation of land far
outpaces the appreciation of a home:
A home in a $400,000 neighborhood that is appreciating
at 10% per year goes up in value $40,000 per year. The
lot next door may be worth $120,000, but in a year it
also goes up $40,000, or 33% appreciation. Hence, the
increase in value is due to the land, not the house
which doesn’t go up in value. It costs the same to build
a home whether you pay $120,000 or $160,000 for the
lot. Of course there may be some changes in the cost
of lumber and materials, but this doesn’t have much
of an effect on the value of the home.
The bottom line - the house on the property is always
worth the same. You can replace it for essentially the
same amount as you can two years from now. It’s the
land that goes up in value.
Once you understand this you will begin to look at
investing real estate opporunities differently. You’ll
see the small unattractive two bedroom rancher in a
great neighborhood for the land that it sits on. You’ll
see the home with an extra lot beside it as two deals.
You’ll see vacant lots as gold mines and, yes, people
go after land in hot markets like the gold rush of 1949.
Why does land appreciate? It’s a matter of supply and
demand. The areas of the country which are experiencing
the highest rates of appreciation are for the most part
saturated. There is very little land left to be developed
and the populations are growing. In some cases there
is no land left and smaller cheaper homes carry a premium
because of the land they’re sitting on. If you can pay
market value for the “home,” you may actually be getting
a “land” bargain.
So when you pursue homes in very hot markets, sometimes
you just have to look at the small home for what it
can become. Don’t pull comps for the home as it is,
but for what it could be. A two bedroom rancher may
be worth $350,000 on its best day, but a new four bedroom,
2.5 bath, colonial may be worth $700,000. If you could
buy the two bedroom ranch for $300,000 or full market
value, the land beneath may be worth more when you consider
the new home that could be built on it.
I encourage you all to open your eyes, understand appreciation,
and look at deals in a different light. For more advice
on real estate investment, keep reading all of our articles.
About the Author: Steve Cook
Since 1998 Steve Cook has flipped hundreds of
houses as an active Baltimore-area real estate
investor. Steve’s unique specialty is the “flipping
homes 1-2 punch”, a proven system of real estate
investing that powerfully combines wholesaling
houses. Also the founder of www.FlippingHomes.com,
Steve is dedicated to helping others in this thriving
online community succeed through understanding
and aggressively applying his time-tested, step-by-step
approach to flipping
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