• Harvey McLean

The Economics of House Vs. Land Value


When one buys a home, one is really buying two main components:

1. The House, and

2. The Land or Lot.

All other things being equal, it is better to buy a home in which the lot (as opposed to the house) represents the higher percentage of the total value.

Two Basic Tenets of Real Estate

1. Lots appreciate in value.

2. Houses depreciate in value.

Lot values realistically run from 20% to 90% of the total value of a property. Discounting inflation, the cap on the value of a house is what it would cost to replace it.

Depreciation is the loss in value over time due to wear and tear, evidenced by the fact that most people would rather have a new home than a used one. Conversely, appreciation is the increase in value over time.

An Example

There are two homes with the value of $250,000. Property #1 has a house value of $200,000 and a lot value of $50,000, while Property #2 has a house value of $50,000 and a lot value of $200,000.

Property #1 clearly has a much nicer structure on it, while Property #2 has a much better location.

The change in house vs. land value over time demonstrates why it is better to put more money into the lot as opposed to the house.

If the houses on Properties #1 & #2 depreciate by 10% over a 5-year period, the overall value of Property #1 depreciates by $20,000 (10% of $200,000), while Property #2 depreciates by $5,000 (10% of $50,000).

A 10% increase in their respective lot values over 5 years would reverse the math above. Specifically, Property #1's lot appreciates by $5,000, while Property #2's lot appreciates by $20,000.

If you combine both assumptions above, Property #1's net loss totals $15,000, while Property #2's net gain is $15,000 over 5 years. The following details the changes in house and lot values for both properties over a 5-year period.

Property #1 Property #2

House Value $20,000 $ 5,000

Lot Value $ 5,000 $20,000

Net Gain/Loss $15,000 $15,000

If you assume a 5-year time period, the total value of Property #2 increases by $30,000 more than that of Property #1.

Net Difference of $30,000 over 5 years = $6,000 annually, or $500 per month

A Parting Thought
The question then arises: Is it worth $500 monthly to own Property #1 rather than Property #2 for a 5-year period or whatever time frame one assumes.

About the Author

If you have any questions about this information, please contact Harvey at harvey@harveymclean.com. With 30 years of experience as a real estate developer and broker, Harvey shares his unique insights into the dynamic world of real estate in this Blog. He currently lives and works in Austin, TX.



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BROKER BIO

A resident of Dallas for more than  and a real estate professional since 2004, Mary McLean is the broker - owner of Dallas McLean Realty (DMR). Representing buyers and sellers, Mary has a passion for providing exceptional service to her clients. Her extensive knowledge of the marketplace and highly effective communication skills help her go the extra mile before, during and after closing to maximize representation on behalf of her clients. Mary holds an MBA from The University of Texas at Austin and a BA from Barnard College, Columbia University. Mary is also a Certified Luxury Home Market Specialist with Guild Recognition™, Certified Negotiation Expert®

Advanced Historic Home Specialist, Senior Real Estate Specialist® and has her GREEN Certification from the National Association of Realtors®.

Dallas McLean Realty is a Trumeau Company founded 1998.