Why the land matters more than the house, and how to actually judge land value

When people look at a property, they usually start with the house. They look at the kitchen, the bathrooms, how old it is, whether it needs painting and whether they like the way it looks.

If you are going to rent the property out, you want a house that tenants will be happy to live in. If you are going to sell it later, you want something buyers will like.

But when I am looking at a house as an investment, I spend a lot of time looking at the land as well.

You can change a kitchen. You can renovate a bathroom. You can even knock the whole house down and build another one, but the block stays the same.

That is why I want to know what I am actually getting with the land before I get too interested in the house.

A bigger block does not always mean a better property

It is easy to compare two houses and assume the one with the bigger block is the better buy. 

A large block with poor access, an awkward shape or a location people do not really want can be less useful than a smaller block in a good street.

A 900sqm block sounds great until you look at it properly and realise half of it is difficult to use.

A 600sqm block with a good shape, decent frontage and a practical backyard might be a much better piece of land.

Start with where it is

The first thing I would look at is the location. Two houses can have almost exactly the same amount of land and be worth very different amounts because one is in a much better part of town.

Look at what is around the property:

• Are the shops close by?
• What about schools, healthcare and other services?
• Is it an established residential area?
• What are the surrounding streets like?
• Who lives there?

If there are plenty of owner-occupiers and families in the area, that tells me something about the type of demand the property has.

You are buying it in a particular street, in a particular suburb or town, and that will have a lot to do with what someone is willing to pay for it later.

The shape of the block matters

A straightforward rectangular block with good frontage is generally much easier to work with than a narrow block or one with an unusual shape.

Frontage is important too. A wider block can make access easier and give you more options with the house and backyard. Depending on the planning rules, it can also give you more options in the future.

So it is better to look at the actual plan of the property rather than just the number written in the listing.

Find out what you can actually do with the land

A block might look like it has room for another house or a subdivision, but that does not mean you can actually do it.

You need to check the zoning, minimum lot sizes, overlays, access requirements, easements and whatever other planning rules apply to that particular property.

The position of the existing house matters as well.

A property can have a huge backyard, but if the house sits in the wrong spot or the driveway and easements get in the way, there might not be much you can do with it.

I would not pay an extra $50,000 or $100,000 for potential based only on a listing.

Look at what is happening around it

If I want to understand what buyers are paying for land in an area, I look at the nearby sales.

• Have people subdivided similar blocks?
• Are newer houses being built on them?
• Are larger blocks being kept as they are?
• What have comparable properties actually sold for?

That gives a much better idea of what the land is worth than an agent describing something as a huge block or saying it has development potential.

The surrounding properties can tell you a lot about how the land is actually being used.

The house still matters

A good house makes a property easier to rent and gives you a larger pool of people who might want to buy it later.

If I have two properties with similar land, I would rather have the one with the better house and better presentation.

What I would be careful about is paying a huge premium for the house when the land and location are not very good.

A renovated kitchen looks great, but someone can renovate another kitchen tomorrow. Bathrooms get updated, paint gets changed and flooring gets replaced.

Land matters most for houses, not everything

I also would not take the idea that land is everything.

It makes the most sense when you are buying a house on its own block. That is where the land underneath the property makes up such an important part of what you are buying.

Units and some townhouses are different.

You might own very little land yourself, but still have a very good investment because the property is in a great location and there is very little opportunity to build more like it.

A well located apartment in an area where new development is heavily restricted could be more desirable than a big block in a weak location.

So I look at land size differently depending on what I am buying. With a house, I want good land.

With a unit, I am going to pay much more attention to the location, the building, the scarcity of similar properties and what buyers are likely to want in the future.

Think about the person buying it from you

If I buy this property today, who is going to want it from me in five or ten years?

An investor might like the rental return, but I also want to know whether an owner-occupier would want the property.

• Could a local family see themselves living there?
• Is the backyard practical?
• Is there good access?
• Is the street somewhere people actually want to live?

The more types of buyers you can appeal to, the easier it generally is to sell when the time comes.

That becomes even more important in a smaller regional market, where there may not be a huge number of buyers around at any given time.

Be careful with potential

It is important to be a bit cautious when the main selling point of a property is something that might happen in the future.

• Maybe you can subdivide it.
• Maybe you can build another house at the back.
• Maybe the council will change the zoning.
• Maybe the neighbouring blocks will eventually be developed.

All of those things are possible. They also might never happen.

I would rather buy a property that works well today and treat any future potential as an extra.

If the numbers only work because you are assuming you will get planning approval, subdivide the block or build something else later, I would be cautious.

What I would look for

If I were buying an investment property, I would look for useful land rather than simply a large block.

• I would look for an established house in a good area, with a practical block, decent access and enough usable outdoor space.
• I would look at recent sales to see whether buyers in that area are actually paying more for larger blocks.
• I would check the zoning and planning restrictions before putting any value on development potential.
• I would make sure the property works as a normal rental and has appeal beyond just its land size.

I am not looking for the biggest block I can afford, just land that people will still want in ten or fifteen years.

Final word

When I look at a house, I want to know what I am buying underneath it.

How big is the block? Is the shape useful? Is there good access? What is happening around it? What can actually be done with it?

The house still needs to work. It needs to be in decent condition, appeal to tenants and give buyers a reason to want it.

But if I have to choose between spending more money on a nicer house or getting better land in a better location, I would usually take the better land.