Buying and selling land for profit, also known as Land Banking, is an investment strategy that requires careful thought, much research and plenty of patience. Basically, it is the process of securing sites at today’s prices for development in the future. Developers have long been making money in this way but that doesn’t mean it suits everybody.
Investing in land usually brings up images of a large parcel of rural land on the outskirts of a metropolitan suburb. Typically the land rezoned over time, infrastructure put in place and then carved up into residential blocks and sold off one by one.
What to look for when buying land
The following characteristics should be on the list of what to look for when buying land
- Level, usable land for easy construction
- Easy to reach by car, or public transport
- Close to an expanding metropolitan suburb
- Infrastructure is planned or already allocated
- Existing residential development nearby
- Healthy population growth predicted for the area
Buying land for investment purposes
Buying land for investment purposes is different from investing in a residential investment property in a number of important ways. The most obvious one is that it’s just land. There are no houses available to live in yet. That presents the first problem because without houses you can’t get tenants so income is virtually non-existent. That makes borrowing to purchase the land somewhat problematical as servicing any potential debt therefore relies initially on your existing income position. Commercial finance is likely to be the best option for a land development project.
Land investment loans can be a problem when buying large areas of land as Lenders have restrictions on what they will accept as security. Sorting out a finance option should be a priority well before signing any Contract of sale.
Investing in land is a long term strategy. Undeveloped land needs time for metropolitan suburbs to expand out to it before there is an increase in value. Typically, large parcels of land are expensive when you consider that there is no income being generated to support any debt. Of course you could buy it using your own money if you have that much but maybe there are better uses for it, rather than speculating about metropolitan expansion.
The value increase comes from demand for house and land as suburbs expand further and further. Obviously, the land itself will need subdividing, developing and planning approval to make it a marketable item for sale.
Land investment pros and cons
If we break it down into land investment pros and cons what can we see?
|Option to develop||Minimal or No income while holding|
|Can have a high profit potential||Limited finance options|
|Securing the land at wholesale value i.e. today’s prices||Rezoning may be required|
|Can be on sold with or without a DA (Development Approval)||Time on the market|
|Costly to subdivide|
|Holding costs can blow out if interest rates rise quickly|
The land banking process does not always include making improvements to the land. Investors or individuals can sell land to commercial or residential developers who add value by making improvements to the land themselves.
Bringing land to the marketplace in a saleable form is the key to making a profit from Land Banking. The bare minimum seems to be having a Development Approval in place to appeal to other developers.
Land Investment Tips
Finally, any land investment tips would have to point out that to be involved in land banking you need a healthy amount of money available to be able to cover the holding costs. Traditional finance from a Bank may be difficult to source and even if there is no loan in place there will still be costs involved in getting a Subdivision in place. There is a tremendous amount of time and effort needed to make sure the entire subdivision infrastructure is put in place to enable the development to go through.
Although this type of strategy would only be suited to a small number of investors due to the specific skills and requirements needed, one adage stays true. There are many ways to make money from property.
Investors Direct is an investment property advisory firm that are focused on growing wealth through property investing in Melbourne, Sydney and Brisbane.