Money & The Law Of Real Estate

The law of real estate states that the value of a property is determined by the income that can be generated by that property when it is developed to its highest and best use now and in the future.

Although a property may have some sentimental value to its owner, the only thing that determines its value is the future earning power and the land that it is on.

Value Of Real Estate

An example of land that has no future earning power could include desert land, which cannot be developed to produce income, provide accommodation or meet any useful human need.

The future earning power of land can also decline over time. For example, there are many areas in large cities which were once considered to be of a high value.

But because growth and development slowed down, or went away, the value of that land subsequently decreased from what it once was.

As a homeowner who is selling their home in such an area, this may result in the property being sold for less than it cost to buy.

Conversely, the value of a property may increase in value should a particular area of land experience growth and development.

In this case, the homeowner can expect to sell their property for more than they originally paid for it.

You Make Your Money When You Buy The House

Most people think that they will make a profit on the day that they decide to sell their house, however in reality the reverse is true.

You make your profit when you buy a property at the right price and under the right terms, which then later allows you to sell your property for more money than it cost you to buy.

It is important to remember this because the better you research a property and its surrounding area, the better deal you are likely to get should you decide to sell it later on.

Pay Special Attention To The Location Of A Property

Perhaps the most important factor which determines the future earning potential of a property, is its location.

Choose a bad location and the property will decrease in value, choose a good location and its value will increase over time.

Real Estate Value Is Determined By Local Economic Factors

There is a simple rule when it comes to selecting a property, the local economic activity of the surrounding area will largely determine the value of your property.

If you purchase a property in a declining community that is losing jobs and experiencing a negative growth rate, you can expect your property to decline in value over time.

If however you purchase in a growing community with an increasing number of local jobs, then you can expect the value of your property to increase in value over time.

A good example of this can be seen around Silicon Valley, where the rapid influx of high tech jobs caused an explosion in property values.

The most important factors which affect the value of real estate are therefore the level of new business formation and economic growth in the surrounding area.

The key to successful real estate investing is to predict in which areas this growth will occur before it does, and then to buy the best property which will later increase in value.