Most real estate investors pursue their business with the goal of flipping and selling for profit the soonest time possible or buying a property and using it as a dependable source of recurring or passive income. These methods are legitimate and proven effective to maintain wealth. However, many property investors overlook a more profitable real estate investment – Land Banking.
What Is Land Banking?
Land Banking is a buy-and-hold method of real estate investment. Instead of placing money into a savings account, where it would earn minimal annual interest, some property investors have considered placing their money through land acquisition – a fixed and tangible asset. This involves buying large plots of undeveloped land with the intention of selling it an opportune time when it has been approved for development or when it will be ready to turn into a profit.
Many investors think that vacant lots are not profitable compared with houses, commercial properties, and apartment buildings. What they have not considered is that vacant lots cost nothing to maintain. Compared with residential and commercial establishments, vacant lot owners do not have to think about utility payments and tenant issues.
Imagine buying a vacant lot, leave it, and come back for it after 10 years and you still won’t have anything to worry about. When you think about land economics, its supply is always going down as demand for its constantly rises.
Land banking is a good way of expanding investment portfolio but there are various considerations you must make before you get into this investment scheme.
Ins and Outs of Land Banking Schemes
Since land banking is not a new concept, existing property developers are often the huge buyers of these large blocks of vacant lots. They buy land, divide it into smaller lots, and sell it to investors. Investors can either buy a plot of land or opt for an option agreement.
Here are some things you must consider before you engage in any land banking schemes:
Investors often think that because property developers sell them land, it already has approval for development. Of course, a vacant lot’s value will increase if it will be rezoned for development. Some lands require council approval before development projects can proceed. If the land cannot receive approval for development in the future, it may not be a good investment at all.
As mentioned, investors can directly buy land or they can choose to go for option agreements. Option agreements are one land banking scheme that allows an investor to set a clause of buying the property only when the land acquires development approval from authorities. However, investors must know that entering into an option agreement means they have to shoulder commission payments, legal fees, and development company costs which may not be refundable if the sale is not triggered.
How Can You Get on Land Banking?
Before getting into the business of land banking, you must first think whether this type of investment suits your goals. Always remember that it may take years for your money to profit from land banking.
To get on land banking, you may start scouting undeveloped areas in your neighbourhood. Check out if there have been any major developments in the past years. You can also talk with the local council to know if there are plans for future developments in the area.