Why Housing isn’t a Good Investment, but Land Is

You’ve probably read enough about investing to know that when your friend says, “I just bought a Lexus; I think it’s a great investment,” you can laugh. Although people constantly talk about their cars as “investments,” from an investment perspective, it’s much better to hold cash in a bank than buy a Lexus. Cars depreciate, and it’s almost impossible to sell a car for a higher price than the price you bought it for.

Houses are similar. Although it is possible to profit off of the sale of a house, houses are relatively durable products that still depreciate over time. Renovating and redecorating might make you money in the short term, but in the long term, a house isn’t a good investment.

That’s not to say that residential property can’t be a good investment under any circumstances. Of course, if you buy residential property with the intention to lend it out and collect rent, you can profit immensely. However, whenever you decide to sell that building to someone else, you’ll likely get it for the same price you bought it for. Consider the housing bubble. At its heart was the belief that a house is an investment – that it will never lose value, and at worst, it will remain the same. This fallacious logic resulted in a nationwide crisis. If individuals had focused on the value of land, however, rather than the value of housing, they may have fared much better.

Land is a good investment because it does not depreciate. At worst, land keeps up with inflation, retaining the same objective value over time. But land does not only maintain its value; it gains value.

Some finance and economics gurus claim that land, especially in America, does not gain objective value. It keeps up with inflation, and because America has so much land, there’s not enough scarcity to make it desirable. However, the reality refutes this argument. It’s easy to see that expansions of Metro systems, for example, make land around urban centers more desirable. This happens time and time again throughout history. It’s difficult to imagine how it could be any other way.

In response to the argument that land in America is not in short supply, we need to put things in perspective. It’s true that millions of acres of land in America go untouched and are in generous supply. However, much of that land is isolated from urban centers or has no access to water and other essential resources. In reality, land with desirable qualities (e.g. ideal topography, promising location, proximity to resources) is in short supply. For this reason, land can gain value astonishingly, and many landowners have sold their parcels at five, ten or twenty times the original price.

If you plan to rent it out, a residential building might be a good way to make money. However, housing is not a long-term investment. Land is a stable long-term asset with potential for growth. For more information about buying land for investment, contact us today!

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.