I'm Jeremy Shepherd. >> And I'm Damian. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. I hear investors say all the time, just buy more land. Land matters.
But size alone isn't what drives capital growth Jeremy. >> That's right, it's not. I mean, it's important, no doubt. Land is important, but the focus of investors is on the square meters, and that's not what drives uh growth, long-term growth. Uh first of all, I want to start off with depreciation and appreciation. So, you've no doubt been taught that buildings depreciate over time.
They They get older and they lose value, but land appreciates. Appreciation is just another word for capital growth. And so, what you're after to maximize your capital growth is uh you would have heard a high land component. Uh the argument being that it's because buildings depreciate and land appreciates, you want more of your money allocated to thing the thing that is appreciating, which is the land. Now, there's nothing wrong with that concept. But then, what should we as property investors be buying?
Is it houses instead of units? Is it houses on bigger blocks? Or is it just pure vacant land? What exactly is it that this high land component term is talking about? And that's where investors get misled. So, most investors, they uh assume this to mean you should buy houses instead of units, and that's not a bad start.
Historical data has shown that houses have outperformed units, and part of the reason for that is probably due to the land component. But another might be the relative potential for oversupply that you're getting unit markets. So some investors aim for houses rather than units. Other investors aim for houses on bigger blocks. And that's also not a bad general strategy, but even that misses the point. Some industry professionals recommend buying a property with an above average block size for that suburb.
Now that's regardless of whether it's a unit or a house. All of this is missing the point, which we'll come to in a few slides time. But firstly, as an interesting aside, I read a blog. This is going back a few years now when blogs were a thing. Where this apparent property investment expert claimed to have discovered the ideal ratio of block size to house size. And you wouldn't believe it.
They just coincidentally happen to be selling properties with that exact ratio. So there was no evidence given as to how they came up with this perfect ratio. In fact, I don't know what makes a perfect what's the target variable here. Is it capital growth? Is it cash flow? I don't know.
They didn't divulge any of that. I'm pretty sure they didn't do any research. In fact, I don't think this came from their research division. My guess is came from their marketing division. Anyway, so be aware of misleading marketing. They'll package it up as if it's education.
It's just BS. So there's a lot of nonsense that gets broadcast about. Hopefully this presentation will set at least one of those wrongs right. >> Blocks of land. >> Yeah, let's start with raw land as an option. So no building on it, just bare dirt.
Do you think a block of raw land would be would have a high land component? Obviously, it has to it's 100% land. So, how about a great big slab of Australian desert? Massive square meters, in fact, square kilometers. How do you think that might have performed over the last, say, 20 years, for example? I can't think of a time in the last 40 years where I've heard of a large piece of Australian very remote regional area square kilometers growing as fast as or even faster than, say, some of the big cities or significant urban areas in regional markets around the country.
So, obviously, therefore, the largest number of square meters is not the answer. Um otherwise, the desert wouldn't be near worthless. >> I guess you there could be a debate, for example, let's say, 15, 20, 30 years ago, I bought acres out, let's just say as an example, Kellyville or out that way and it's gone crazy. There's no so >> There's always outliers. There's always exceptions to the general rule. >> that's the thing, there's always outliers.
So, I know a lot of people think oh you know, units in, for example, Perth and Townsville and all these other markets have done really well in the last year they've done close to even actually outperforming houses just because of the affordability at the time of recording of January 2026, but there are always outliers. So, we don't say it always happens. There's always these outliers, right? And you can do your research. >> Yeah. So, the general rule about the lottery is you play, you lose.
That's because of if you take a large population, most people lose, but there are outliers. Some people win. >> The example I like to use is when I used to live in Melbourne out Donnybrook way north of Melbourne, just farmland and farmland. Like, there was nothing but a couple of actually, on each of the different um projects there. And look, I haven't been there for 5 years now, but all I remember was it was just farmland. You wouldn't touch it.
>> Yeah. So, my point here is that we're looking at um looking at some historical data. It's not the number of square meters that's the uh that's the goal. Um because uh this highly rural remote locations, these locations simply haven't kept up to pace with uh stuff closer to to the cities. Um now that's not to say the developers don't buy vacant land for their house and land packages. They do, but these uh greenfield estates are on major city fringes.
Uh and they might be hectares in size, but they're not square kilometers in size. So, clearly raw size on a large scale is not the key to growth. Okay, so what about land in a major city like Sydney? Uh well, there are a few problems. Now, that's the right size. >> Mhm.
>> Uh slide, yeah. So, there are a few problems with uh just buying raw land from an investment perspective, finance, rent, and tax. So, let's look at each one of those. Uh I've got a separate slide for each. Yeah, so firstly, it's hard to get finance to buy land unless you plan to build on it. >> Mhm.
>> So, leveraging more from a good investment is often not possible. Secondly, without a property on that block of land to rent out, how do you earn any income from it? And that's part of why lenders do bulk at it. And that leads to the third point, if an asset doesn't generate income, you can't claim expenses related to that investment as a tax deduction. So, that's interest on the loan, um that's council rates, um you probably wouldn't have any insurance for a block of land, but there's nothing else that's uh tax deductible. So, any expense related that asset would not be tax deductible.
Legal fees, accounting advice, all that sort of thing. So, now just want to clarify, land is not a terrible investment. It's just that it has some issues which might not make it the best investment. >> The challenge I've seen in the past is I've had clients where they've just sat on a block, but they want to accumulate their property portfolio, but they can't grow the portfolio because it's sitting on this block that's just doing absolutely nothing and hurting their cash flows. So, they've got the whole idea of maybe Airbnb it or having a a holiday home down the track, but different story if you're already comfortable, have three, four properties, things are going well, and you can hold on to that block, but um yeah, I would say that that's just most probably one of the big the big negatives. Um on the positive side, you can put money down on a block, gets registered in like say a year or a year and a half, and you might have bought the block for 250, now it's worth 350, you go back to the lender and say, "Hey, I'd like to um take out some equity against the block and then build a home on it." So, you can actually get in really cheap, but it's a lot harder to do these days.
Back in maybe 2016, '17, '18, in a lot of these new land releases in New South Wales, easier. Now, good luck because a lot of the demand's already hit those pockets. >> All right. >> Uh when you look at areas like Austral, for example, like absolute fortune now to get in there. >> Oh, yeah. Okay.
>> Yeah, so the earlier you can get into a lot of these new estates, the better, but again, you've always got that supply risk, but yeah, the builders can't keep up these days. >> All right. So, what should investors really be looking for then? Um well, it's not the number of square meters, and it's not the block size versus the floor size. That's a crazy ratio nonsense. Uh it's actually got nothing to do with square meters at all.
It's to do with dollars. So, it's where are your dollars allocated? Are they allocated to the land or to the liability, dare I say liability? And here's the big metric that you should be focused on. Drum roll. >> Land >> Land to asset ratio.
So, what you're really after is the highest possible land to asset ratio or LAR for short. So, properties with a significantly higher land value compared to the total assets value will outperform similar properties in the same suburb, even in the same street. I'll show an example soon, but first, if you could just move on to the next slide. This is just how we define this this metric. So, let me just back up a bit. If you've ever seen a professional valuation report, you'll have noticed that they the valuer might qualify the land value as opposed to what they call improvements, which is the value of the building that's been plonked on top of the land.
So, improvements is the word they use for buildings. So, with a value for the land and a value for the improvements, we can now more accurately define the land to asset ratio as in this example, let's say you've got a property valued at $500,000. The land might be valued at 200,000 and the improvements, that's the building on top of it, valued at 300,000. So, the land asset ratio in this example would be 40% since 200,000 is 40% of 500,000, the total assets value. And by the way, this is a very low LAR. I wouldn't touch a property with an LAR this low.
You want at least 60% and the higher the better. In fact, there was I remember reading another blog a developer, of course, and they were bragging about their high land to asset ratio. It was 30%. I just thought 30%? If it was twice that high, I might be interested. Why would you brag about 30%?
It's just terrible. Anyway. All right. So, why do we look at it? If you go to the next slide, please, Damon. Why are we looking at it this way?
So, remember how land appreciates and buildings depreciate? Well, we want the highest proportion of our asset appreciation appreciating and the lowest proportion depreciating. So, we want as much of our money going towards acquiring an asset and as little as possible going towards I'm calling it a liability. I mean, an asset appreciates, for example, land. A liability depreciates, for example, the building. Now, that might be a little unfair to say the building is a liability.
After all, the building does generate income and the land does not. The thing is capital growth trumps rental income. Rental income will not hasten your early retirement, your early financial independence. So, investors should prioritize growth. >> You'd call it a depreciable asset. You wouldn't call it a liability.
A liability is on the negative from an accounting side. >> Yes, that's right. From a strict accounting perspective, because it's generating income, it's not really a liability. >> What you're talking more about here is that land goes up and the building component depreciates over time. >> So, if you were purely interested in capital growth, you would have [clears throat] to view the building as a liability and the land as a an asset, but technically, from an accounting perspective, the building is an asset because it generates income. >> Yeah, talk to your tax accountant, but typically if you build like a brand new uh house on a block of land and it was an investment, you could claim that building component against your tax return over the 40-year period.
So, 2.5% per annum. That's just the building component and then you've also got your fixtures and fittings also, but you can obviously talk to your tax accountant about that. >> Yeah, and bear in mind that when you claim this is a tax deduction, you don't get it all back. You don't even get half of it back. So, it's still a loss. You're still worse off.
So, if you claim $10,000 in depreciation in 1 year and you're paying 40 cents in the dollar, you'll pay $4,000 less tax by making that tax claim. That doesn't mean you're better off by $4,000. It means you're worse off by $6,000, but you're only worse off by 6,000, not worse off by 10,000. >> And you can buy new and outperform the national average. I'm not saying that like So, there's outliers, but if we had, let's say a million dollars to spend, we wouldn't go buy uh a house on a block for an investment, right? We'd buy something that's already older.
The value's in the land. That's what we'd target cuz it gives us the highest probability of capital growth moving forward. >> And for a really comprehensive rundown on that, check out episode number three, new versus old. >> All right. >> Episode in the expert busting series, sorry. Yeah, so the amount of growth comes from a high land asset ratio um and a this is a concrete example here.
So, imagine uh property A is like the one I described earlier. It's worth 500,000. It has $200,000 worth of land. So, it has a land asset ratio of 40%. Now, property A in this infographic that's uh it's that's the $500,000 total value. Land only 200,000.
That means the building must be worth 300,000. So, calculating the LAR, we get 40%. Now, compare that to property B that's also worth 500,000, just like for like comparison. However, property B's value consists of 300,000 dollars worth of land and 200,000 dollars worth of building, which results in a land asset ratio of 60%. So, two properties, same total value, but property B has a higher land asset ratio than property A. So, how could that be possible?
Well, property B might be um Well, might have a smaller house on it or might be older. It might have a bigger block or the block might be in a better location, so it's valued higher. Now, this is a year zero. So, we've got 40% LAR and a 60% LAR. 500,000, we're both starting at 500,000. So, the left column on this graphic is the start year.
The right column is after 1 year. Now, let's see how a year has changed the values of property A and property B. Let's assume that the land for both properties grew by 10% over that year. Let's also assume that the buildings depreciated by 2%. Now, normally newer properties depreciate faster than older properties, but just to keep things simple, they both depreciate by 2% over that year. So, after 1 year, property A's land has grown by 10% from 200,000 to 220,000, whilst the building has depreciated from 300,000 to 294,000.
So, it's a decrease of 6,000, which is 2% of 300,000. So, the total value is now 514,000. And you'll also notice that the land asset ratio has improved. It's grown from 40% to 42%. Property B's land has also grown by 10% from 300,000 to 330,000. And the building has also depreciated from 200,000 to 196,000.
So, the total value of property B is now 526,000. So, now the difference in prices now after only 1 year. Property B has outperformed property A even though both properties have the exact same rate of appreciation in land and the exact same rate of depreciation in building. The reason why B had almost double the growth of A is because property B had a significantly higher land to asset ratio. And note how the land to asset ratios have changed now. The value of the land has gone up and the value of the building has gone down, so the LAR has improved in both cases.
And the longer you own a property, the higher the LAR will be until you either renovate or knock down and rebuild. Damian, I can see you thinking about something. >> Yeah, I am thinking. So, the only thing this doesn't take into consideration, and again it's outliers, there can be that emotional aspect to a new property. I don't want to live in an older property. I'm willing to pay a premium.
So, if you've got, let's say, you know, 10 offers going in on that property that has that higher building component because people are more emotional. It's got the theater room. It's got the four bedrooms. That can be a bit of a a factor into the price, too. But like-for-like overall, we're talking about LAR here, the land to asset ratio. But it's just something to factor in that um if you do have that sort of side-by-side comparison, people can get emotional with the >> Well, it's it's that interest in new property that makes new property a bad investment because let's say everyone loves new property.
Nobody wants old property. >> Mhm. You buy a new property, next year it's not so new. Next year, it's even less new. Next year, so the thing that you paid a premium for is now disappearing. It's evaporating.
Um so, yeah, people do prefer to live in new property and that's why you shouldn't buy them because they depreciate, they get older. You can't own them for a long time and benefit from them uh being new all the time because they don't not. That that newness goes away. >> There's always that market, right? For example, like new cars, people can't afford a new car, but they'll go finance it. They don't want that used car.
They're willing to pay a premium. Um obviously there's a lot bigger supply for for cars, especially with a lot of them coming from overseas. Um But agree. Agree with you, Jez. >> Yeah, they they depreciate. >> The very thing that people find attractive is just fading away.
>> Yeah, like you say, buy that brand new car now for like 80, 90,000. In 10 years time you'll be driving for 10 to 15,000. So, if it's been maintained well, it's got the history books, there's nothing wrong with that car. So, yeah. It's good. Land tax is a separate thing.
>> Yeah, so um good versus bad. Yeah, so the focus is on a high LAR, not high square meters. Uh and that is why, oddly, some units actually have high LARs. So, just remember that it's not the square meters, it's it's calculated based on dollars, not on square meters. Uh yeah, that's what matters. So, most units won't have a very high LAR.
The ones that do are in small uh boutique blocks and they're usually very old. Now, imagine a high-rise apartment complex built on a block of land worth, say, $20 million and there are 200 units in that complex. So, each unit therefore has a land value of only $100,000. Now, if the unit cost an investor $500,000 to buy, then the land asset ratio is only 20%, which is appalling. Uh and as a result, the growth is usually appalling, too. Uh contrast that with a group of say 12 units in a three-story walk-up boutique complex, if the land was bought for 2 and 1/2 mil, let's say 2.4 mil to make the numbers easier, then each unit has land value of 200,000.
So, if they're still priced at 500,000, they have an LAR of 40%. And that's still very low, but it's twice as good as an LAR of only 20% in the high-rise. And interestingly, the houses with the highest LARs are also old, uh which makes perfect sense when you think about it. Older dwellings have already depreciated and lost much of their value. All that time they were depreciating, the land was appreciating. So, over time, the LAR gets higher and higher.
So, if you do if you have bought a new property, uh wait long enough and eventually the land asset ratio will creep upwards. >> Mhm. >> All right. So, right now, the uh penny is probably dropping amongst uh some of you that uh the old age debate, new versus old. Uh if it still hasn't dropped, check out episode number three. I mentioned that earlier.
Uh it's in this expert busting series. New versus old is the title of that, episode number three. And that's why you should not buy new properties. All right, there's a similar one on why you shouldn't chase after properties with high depreciation. Um they're called high depreciation benefits. There's nothing beneficial about depreciation.
Depreciation is detrimental. Appreciation is beneficial. So, that's episode number seven. Check out episode number seven in this expert busting series. In summary, uh new properties have a higher building value, therefore a lower land asset ratio. Older properties have uh higher valued land and lower valued building, and therefore have a higher land asset ratio.
Uh and don't think that depreciation claimed against your income is uh a a benefit. It's a it's a detriment. So, yeah, don't get those two confused. I still find myself every now and then saying depreciation benefits. It's a misnomer brought into the industry by property developers. It's it's rubbish.
All right, in conclusion, so the LAR is a pretty straightforward concept, uh little hard to argue against when the maths is so easy. So, how come this is such a poorly understood concept not common common knowledge among property investors? So, remember what I said about the nonsense being broadcast around? Uh Imagine you're a property developer and you're trying to flog off some stock to uneducated investors. Uh teaching them about the LAR isn't going to help you sell anything. Uh and that's when their BS starts.
So, if you're interested in protecting yourself against more of this sort of BS, uh yeah, check out some of those other topics in this series that I mentioned, in particular episode three and seven. Damo. >> All righty, so that was >> [music] >> um yeah, I think you made all the good points there. The land size is the big one. Um my only takeaway is that >> land value. >> Land value is all we're after.
>> Dollars dollars on meters. >> Dollars. And another example we could use is let's say [music] we use Marrickville as an example in New South Wales, Sydney. The block sizes are really small, but the value is so >> Yes, high. >> high. But then there's areas you go down as far as Bateman's Bay as an example.
So you'd have to sort of work out what's the dollar per square meterage on the the land. But supply is a big issue, right? That's the biggest thing. I think that [music] desert example that you used or the Donnybrook example that I used, um, just watch out for those that constant farmland. So, [music] um, next up in the expert busting series, I think it's, uh, 22 market cycles, when to pivot to a better market. Thanks for watching.