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The difference between property and real estate as investor

P-R

By the time I was 22 I had bought, sold or developed more than 40 properties. I thought I knew a thing or two about real estate. I had no idea!

Like a lot of ‘would be’ property moguls I had reached that place where I was tapped out financially. I had maxed out my borrowing capacity and cash flow was stressful. I decided to look for a partner. Someone with deep pockets and, more importantly, someone I could learn something from.

My criteria for the right partner was having a minimum 20 years in the business and at least $100M in property under their belt.

One day I was bragging about my accomplishments when one of the moguls asked me the one question that hit me right between the eyes: “how much land tax did you pay last year?” I had no idea.

In fact I’m not sure I even paid land tax or even why it was relevant. Then he told me a truth I live by today… In this business, everybody has a story – but there’s really only truth in numbers.

Lesson learned

Always remember the difference between property and real estate.

This is important because the golden rule of property and step 1 in my 7 Steps to Wealth book is “Land appreciates, buildings depreciate’. Real estate is the land. Property is what sits on the land. Land is the commodity and the only part that grows in value.

Last year I spoke at the Sydney Property Expo and tested my audience of 150 people or so. I showed a slide with some interesting stats from RPData/Corelogic:

— The Sydney median UNIT price in 1985 was $70,500 and is now $660,000.

— The Sydney median HOUSE price in 1985 was $88,350 and is now is $920,000.

I then gave the audience my take on the REAL value of that 1985 median HOUSE price: “It is, in fact, now worth $1.2M not $920,000”.

I asked my audience why I would make such a statement. The answers were quite interesting; it went from different suburbs, inflation adjusted, income not accounted and so forth, and of course let’s not forget the usual default answer everyone uses in property: location – location – location.

The answer is a number!!! In a sea of perplexed faces, I then surprised them with the real data:

— The average size block of land in 1985 in Sydney was 800m2 when today it’s down to nearly half at 435m2.

— The 435m2 house and land might sell for $920,000 but in reality the 800m2 lot with any sort of house on it – that you purchased back in 1985 – is really worth at least $1.2M.

There is only truth in numbers.

What does it all mean to you as a real estate investor?

It means whenever you invest in real estate you must know your land content. Our clients invest with a minimum of 40% land content and this is one of the seven key factors I believe you need to be successful in your investment strategy.

Here is an actual example of how it works: We bought 400 blocks of land in Sydney from 2011-2013 for around $558/m2. We put houses on them to give us leverage, cash flow and tax deductions; today the land is worth between $1,200-$1,500/m2.

That represents an average growth of 140%, while the median house price in Sydney went up by 72% for the same period.

A fool and his money are soon parted

There are a lot of people out there providing advice who don’t actually own any real estate, so here’s an essential question to ask before you follow any real estate advice: “Can you show me your land tax statements for the last seven years?” That will tell you all about their true property expertise and experience. These numbers are very relevant in a world dominated with overload of information.

For the record I paid $187,000 in land tax in one state alone last year and have done so for more than 15 years. I own property in three other states.

In 2015, Sydney land price per m2 went up by 46% while the average block size dropped by 7%. The median house price also went up by 11.5%. These numbers clearly indicate that in this rapidly evolving climate, the end game in property is and always will be land use.

By JOHN FITZGERALD
Source : http://www.apimagazine.com.au