When you are upsizing from an apartment or townhome to a home where you own the land, suddenly, you’re not just buying a home now, you’re buying a solid piece of LAND.
You are now a landowner. That land belongs to you. You don’t need to be a Real Estate Agent or Real Estate Investor to know that land goes up in value.
Do apartments go up in value?
Short answer: NO! Long answer: In the long, long, long run, they do go up in value… Sloooooooooowly.
Let’s do some basic calculations to illustrate this:
Let’s say you bought an apartment for $400,000 and your down payment was $100,000, you owned 25% and owe the bank 75% or $300,000. 5 yrs later, your apartment’s worth ~$440,000 (2% increase/yr), ~$487,000 in 10 yrs at that rate. So, how good of an ROI (Return on Investment) is that?
BTW: ROI (%) = NET PROFIT/INVESTMENT X 100
After 5 yrs, your home went up $40,000, you only put down $100,000 and let’s say you never paid any mortgage payments out of your pocket, you always had a tenant and the rent covered the mortgage payment and strata and all the monthly fees.
That’s $8000/yr divided by $100,000 = 8% ROI.
After 10 yrs, $87,000 gain = $8700/yr divided by $100,000 = 8.7% ROI
In the same scenario if you bought a house for $400,000, 5 yrs later, your house would be worth ~$560,000 (~7% increase/yr), ~$800,000 (double) in 10 yrs at that rate.
5 yrs later, your home went up $160,000 which equals $32,000/yr.
$32,000/yr divided by $100,000 = 32% ROI
After 10 yrs, $400,000 gain = $40,000/yr divided by $100,000 = 40% ROI
A common question I get asked all the time is, “why do houses go up faster than apartments and townhomes?” It’s actually a common business principle of supply and demand.
Land is very limited. As land becomes scarce and population increases, the city will promote densification, meaning building multi-family developments like townhomes and high rises. Instead of using 1 acre of land to build 8 homes, a developer can now take 1 acre of land and build a high rise to house 300 homes.
It’s a WIN-WIN situation for the developer and the city. The city brings a solution for affordable housing demands and the developer makes a lot more money selling 300 homes than selling 8 homes.
As the city fills up with more and more multi-family developments, single family houses and the land they sit on become Gold Mines in the eyes of everybody. They become rare like Ferraris or Blue Diamonds.
People want to buy houses on land because they know the developers, if given the go-ahead by the city, would jump on that land, pay a hefty premium and develop it and densify that land like mad.
Developers drool as they think “More $Profit/sq ft”
Investors’ eyes light up as they see a Gold Mine when they see a home on a large piece of land