Real Estate As An Investment Part II - The Value of Land

Land is and has always been considered the basis of wealth. Historically landownership distinguished aristocracy from other citizens and is still commonly associated with power.

Land productivity is a major source of wealth. The potential productivity is what determines land value.

Land + Labor + Capital = Valuable Goods for Society and Wealth for the Land Owner

Some examples of productivity are Cultivation, Development, Mining, and Drilling.

Undeveloped Land
Raw Land, undeveloped, lacks the facilities to support building construction, remains unproductive, and creates a tax burden for the owner.

Attractive Resources
The value of raw land for surface development depends on its proximity to resources that attract people. The availability of jobs causes people to settle in an area.

Population and Land Use
Once people are attracted and settle to an area, then the main factor is the lands potential value. The most critical factors for land speculation is the population and the potential land use.

Population Growth Patterns

Population, Investment and Development change raw land into productive land. Population Growth follows work, traffic and living patterns.

Work Patterns follow the principle that where there are jobs people will follow. This creates a demand for schools, shopping, recreation, and housing. New jobs provide pressure for land developments.

The availability of transportation is a major influence on growth patterns. People like the idea of trains, bike paths, bus routes and anything else that would make getting from point A to B as fast and simple as possible.

The style of living is what people expect or want but is limited to work and traffic patterns. If people want to have a park or major shopping center nearby they are more likely to live as close to those points as possible.

Land Development
As people are attracted to an area, land becomes more useful and valuable. Land in a growing area increases in value because of its location which determines its use.

Zoning Directs Land Use
There are generally only major 4 types of land use; Single-Family Residential, Multi-Family Residential, Commercial and Industrial.

Single-Family Residential
Housing density is a minimum of 3.5 or 4.3 building lots per acre for local and FHA requirements. Subdivisions must meet local and federal standards of housing density. Small lots are considered 60’ x 100’ and large lots are considered 80’ x 120’.

The value of a building lot is the Land Costs divided by the Total Property Value. For example if the land costs $20,000 and the Total Property Value is $100,000, than the value of the lot is 20%. The value maybe as small as 20% or a maximum of 80%.

50% of the land price goes towards development. The other 50% usually covers land costs, risk, profits, and potential lawsuits.

Increase in costs have encouraged Higher Density Housing such as townhouses and patio homes. A Zero Lot Line is where one or more exterior walls are adjacent to the property line or share common walls with another property. The density can be increased to 6 or 7 units per acre lowering the per-unit land costs.

Multi-Family Residential
Land density can vary greatly but it generally begins around 18-20 units per acre for a two story garden apartment and can increase with additional stories. If you can get 28 apartment units per acre compared to 4 single homes per acre, you now have a 7 to 1 ratio. That means the land value can increase 7 times! Builders try to keep land value at 20-25%.

Commercial Land
This is land that is suitable for stores, service facilities, offices and warehouses. Public access is important so commercial land frontage along major road are more valuable. Often land is valued by the front footage line, but each use will determine how to value land. A store facility wants high traffic or a high number of people walking, where a warehouse is looking at truck traffic and railroad siding.

Industrial Land
Industrial businesses use land for manufacturing, refining or processing. Good land provides access to extensive support facilities such as, transportation, power, materials, manpower, services and supplies. The land value has no direct pattern but it must comply with environmental standards, fit the purchase requirements, and most significantly the value can reflect the financial strength of the purchaser.

Chip Plumley can be reached at (610) 444-9090 or (610) 357-8635.
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