Land to asset ratio is a critical factor when assessing the quality of an investment property, yet isn’t readily understood by most investors.

The land-to-asset ratio is the proportion of the overall property value made up of the land component. For example, if a property has a purchase price of $1 million, and the land value alone is $500,000, the land-to-asset ratio is 50%.

Knowing the land-to-asset ratio of a property is important because rising land value is the primary driver of price growth, whereas on most occasions the dwelling is depreciating in value.

For this reason, it pays to have an optimal percentage of the property made up of the land value.

From an investment perspective, you should strive to select an asset where the land represents 70% of the value of the property, with 50% as the minimum.