Sometimes the value of a rental property is not in the building, but entirely in the land. This is often the case where prices have risen rapidly and there’s an older stock of smaller homes. A good example is the San Fernando Valley near Los Angeles. Many homes were built there after the Second World War through the fifties and sixties. They tended to be smaller homes, sometimes with three bedrooms and only one bath, often under 1,500 square feet.

However, because land was cheap in those days, these homes were often built on quarter acre or larger lots. Today, these houses might sell for anywhere from $400,000 to 560,000. However, if the lot is located in a desired area and a big modern home were put on it, the new house/lot could sell for many millions of dollars. Thus, another way that some investors are making money in real estate, particularly those with links to the building industry, is to buy and “scrape.”

Scraping means tearing down the existing home and hauling the debris away as garbage. Then, a modern new home is con­structed. This is a challenging endeavor as a morass of financing, permits, and building challenges must be over­come. However, many entrepreneurs have repeatedly used this route to acquire a substantial real estate fortune. Note; Sometimes it is better to scrape only a portion of the existing home and add onto it. This is particularly the case when there are added costs involved with totally new construction, such as connecting to utilities, paying school district fees, and so on.