Land Banking has become a way to expand an existing investment portfolio or get the property market; however, there are some things you should be aware of before you hand over your money. Here we explain how land banking works and the pros and cons you take with this type of investment. Whether to place your money in a land banking proposition.
First and foremost, What is land banking?
Land banking is a real estate investment scheme that involves buying large blocks of undeveloped land with a view to selling the land at a profit when it has been approved for development.
Now let’s look at the Pros and Cons
Pros
Land Appreciates
It’s often said that land appreciates while buildings depreciate and require maintenance, and this is by and large true, so it is vital to invest where there is a massive and growing demand for a limited supply of land.
Land Banking Value
By obtaining property development approvals you can add substantial value to a site. Once you obtain a development approval for subdivision or for multiple dwellings, apartments or townhouses, you’ve taken out one element of the property development risk — the council approval process.This makes your site more attractive to developers who may be prepared to pay a premium for it and it gives you the option of selling for a profit, or refinancing and continuing with the property development process.
Land Banking Is A Tangible Asset
You can call your own shots in land banking, when you buy a property, typically most investors will approach a bank who will lend them the majority of the purchase price in a form of a loan. when you buy land prior planning permission, you can completely avoid dealing with the banks and any sort of mortgage lender because it’s so cheap and hence requires very little start-up capital. you can even option land deals, gain planning permission and then selling them on to developers or other investors
You can crease Your Return
This is where the seller finances the deal at 3% and you can find a buyer who pays you 6% at a slightly higher purchase price. Because many banks will not lend on vacant land, you can make this an interesting prospect for any potential buyer and make the difference as your profit, as ‘easy money’ financing on land is quite difficult.
It’s not expensive to own and maintain land
Unlike residential properties where you have to service the monthly mortgage payments regardless of whether the property is occupied, keep the tenant happy, ensure all the gas safety checks are up-to-date, find a tenant and all the other fun and games which are required when successful managing and letting out a property, with vacant land, if you want a ‘park-and-forget’ strategy, this could be the exact wealth vehicle that you’re looking for.
Cons
Failure to get developmental approval
In a land banking scheme, the worth of your unit depends on future zoning changes and the consequent demand. Sadly, there is no guarantee that the land will get council approval for development in the future or not. If the land you are buying is rural farming land, there is no surety that it would be rezoned to residential land. Thus, when you invest in a land banking scheme, there are chances that you end up with a dud piece of land that you are unable to build upon or resell for profit.
Option agreements
Some land banking schemes have option agreements with a ‘sunset clause’ that is triggered 20 or 25 years from the date of the agreement if the land fails to be rezoned or developed. If this occurs, investors may lose the initial option fee they paid if there’s not enough money to repay all option holders. When investors enter into an option agreement they may also have to pay legal fees, commission payments and payments to the development company that may not be refunded if a sunset clause is triggered.
Beware of scam, even if you want to invest in land banking. Be assured you are in safe hands having done an excellent research and invest in a reputable company!!!