_{Highlight segments:}

_{3.29 – Cate introduces this week’s listener question. Catherine and her husband are wondering whether they should focus on paying down their mortgage or investing in property.}

_{8.15 – Cate steps through the sequence of questions that a prospective investor should be asking themselves}

_{15.09 – Cate reads our next listener’s question about the limitations of the Land to Asset Ratio as a metric}

_{23.30 – Sneak peek into next week’s episode – what initiatives could be considered to ease the housing crisis?}

_{28.10 – Dave tackles Lennard’s question about how a buyer could attribute a value to both the land and the dwelling components of a property.}

_{43.26. – And our gold nuggets!}

This week’s episode features a two great listener questions, the first from Catherine.

“My husband (39) and I (32) are doing well financially and trying to decide our next move. Our goal is to pay off our mortgage but we feel like maybe we should be buying an investment property. In SA western suburbs, our house is worth around $900k and our mortgage is sitting at $290k. We have a spare $3000 monthly (after bills and allowances) that we are putting on our mortgage. If we buy an investment property it will be negatively geared but we aren’t sure whether it is worth buying now as we will have to contribute to repayments. To buy a house with some land in a decent area is around $600-700k+. Will the tax deductions be worth it or should we wait and keep smashing our mortgage, pay it off in 5 years?”

Many people feel compelled to pay down debt, but this isn’t necessarily the optimal way to build future wealth. The Trio share their individual thoughts around Catherine’s dilemma, explaining leveraging, setting financial goals and discussing the positives of good debt. Dave also includes a scenario to illustrate the potential in store for Catherine and her husband.

Dave acknowledges the strain and subjectivity of such a personal decision. Debt aversion can strike many, and as he points out, understanding our surplus cash flow is a critical step to getting it right. The scenario Dave cites is modest, and the modelled outcome spells a $500,000 superior net asset position for our listener couple.

Our second listener question challenges the use of the Land to Asset Ratio as a metric. Lennard’s musings are plentiful and Cate, Dave and Mike tackle each one.

If capital growth is maximised by a higher Land to Asset Ratio, why wouldn’t an investor just buy land?

And is a million dollar farm in the outback a better investment than a small parcel of land in a blue chip, city suburb?

And how do you quantify the exact land to asset ratio metric?

Lennard’s questions are probing and they keep the trio on their toes. They canvas the difference between capital growth returns, rental returns and tax returns. Each also offer examples to help explain the ways in which a Land to Asset Ratio metric can be a helpful measure.

Dave tackles Lennard’s question about how a buyer could attribute a value to both the land and the dwelling components of a property. He points out that it’s not an exacting science.

When can dwellings appreciate? Dave takes up the challenge and faces it head on, citing scarcity, inflation and maintenance. Mike chimes in with the term “functional obsolescence” and he illustrates depreciation.

Land to Asset Ratio is not static, and nor is there an optimal ratio. It’s important for investors to recognise where their own tolerance comfortably sits.

….And our gold nuggets!

Cate Bakos’s gold nugget – Due diligence counts for so much, and it goes way beyond Land to Asset Ratio calculations.

Mike Mortlock’s gold nugget – Value drops and depreciation are two very different concepts.

Dave Johnston’s gold nugget – Land to asset ratio is just one factor when assessing the future capital growth prospects of a property. It is not a valuation methodology at all.

And if you have enjoyed this episode, we recommend you listen to these eps:

Ep. 16 – Unpacking land to asset ratio

Ep. 18 – When to hold and when to fold!

Ep. 60 – Why established properties outperform 

Ep. 89 – Capital growth – what increases property value? 

Ep. 125 – Does size matter? Should you buy a small block of land in a great location or a bigger block further out? 

Resources on Land to Asset Ratio:

https://propertyplanning.com.au/land-to-asset-ratio/#:~:text=What%20is%20the%20ideal%20Land,per%20cent%20as%20the%20minimum.

https://propertyplanning.com.au/why-the-land-to-asset-ratio-of-a-property-can-determine-its-future-price-growth/

Why is this ratio *such* a valuable measure for capital growth prospects?

Two ratios that will optimise your investment outcome

Why are some properties cheaper years later, after they are no longer brand new?