Land banking strategy…what’s the appeal and why are more and more investors looking to put their cash or super into property?
Land banking strategy…one reason is leverage and ability to get capital growth. Land banking strategy is used by individual investors and corporate land developers.
The strategy of purchasing a parcel of land and holding (or banking) it five or more years for future sale or development. Developers like to subdivide and market residential land estates in regional areas because there is an abundance of vacant land.
Bear in mind as you continue reading, you must never buy land on impulse, always evaluate on your due diligence before you buy. The first proven rule of buying land for investment is its location. Only consider land in developed area where it is already scarce.
Land banking, always consider the inherent value of land in the true context of an investment. The reality is there are hidden dangers for new home buyers and investors in land…mostly in the area of unimproved land, because the potential for fraud is much greater.
Firstly, the value is comparatively low, which makes it easier to find gullible buyers. There are fewer opportunities for fraud if land already has been subdivided and improved in terms of roads and footpaths, sewerage, drainage and other services are available.
Second is in the cases where over development in rural, regional and resort towns occurs, whereby property developers have used options to control land, speculated demand in area which as a result have remained in semi-dormant existence for many years…
Successful land banking strategy requires planning and patience because the process of land banking is divided into three equally important phases:
Land banking strategy in the planning phase is based on the premise the more time you have until your retirement, the better land banking works for you. Why? Because the sooner you start implementing your retirement strategy the more time you get compound returns which works in your favor.
Time is the most important component of any retirement strategy, right? You cannot buy or trade for more time, which means after careful thought and calculation of your retirement needs and goals, you need to understand the land banking strategy.
The next step in the planning phase is to answer the following questions in order to maximize your return:
- How many parcels of land would you buy?
- How frequently to add new parcels to portfolio?
- When do you plan to start selling the properties?
- What areas would be purchased?
- What areas avoided?
The answers depend on your personal time limitations, current cash reserves, retirement plans, and leverage capabilities.
Landing banking strategy in the accumulation phase is where you begin researching for your first parcel of land with intention 0f purchasing with available cash reserves or in your self-managed superannuation fund (SMSFs)…
In case you weren’t already aware, it’s entirely possible to borrow money under a Self Managed Super Fund for the purpose of investing in property around 70-80 percent of the value of a residential property or 60 percent for commercial property.
You would continue this same process over a predetermined number of times based on property location and price, it may make sense to add a parcel to your portfolio every year, every two to three years or whenever you find the right bargain or opportunity.
Smart individuals, investors and land bankers consistently find good properties at good solid values because there is no need to panic or overpay because time is on your side if you plan ahead.
Land banking strategy in the distribution phase isn’t as simple as accumulating properties, yet is definitely more enjoyable as you start to reap the rewards of your strategic planning.
This means if you purchased six properties, perhaps all six are sold during the first 5 to 10 years or so of your retirement. If you don’t want to delay your payout, you would put all of your properties on the market at once.
Another option would be to start selling your properties a couple years before you retire. The possible benefit of selling one property at a time is market values could potentially go up.
When you are closing in on your retirement, you need to develop a selling strategy based upon your revised needs and goals, health, and current market conditions…does that make sense?
Your optimal goal would be to sell your property to an end user, such as a residential or commercial developer with the intention to leverage substantial appreciation in your property.
Land banking strategy which can be leveraged over the years to increase its value, could be and not limited to:
- Rezoned to a more valuable zoning (i.e. from agricultural to industrial).
- The zone density gets increased (i.e. your property goes from one house per acre to a zoning for three to four houses per acre).
- Paved roads and or utilities start moving closer to your property.
- New and major projects get announced near your property.
- Population growth which increases demand for land and increases land values.
The most important component in an area is to determine future land values, which lies in the answers to questions such as:
- Will specific area continue to grow?
- At what rate will it grow?
- How will supply in the area push demand?
Land banking strategy, no one has a crystal ball to look into the future with perfect clarity, right? What we do know is a specific area by choice is the most highly desired place to live and work, yet is running out of area to grow.
What if the current situation is an abundance of relatively cheap and affordable land? Is the area the perfect land banking strategy?
Land banking encourages homebuyers and property investors to pay deposits on land in proposed new estates with deferred settlements of 5 up to 12 years.
The idea sounds great, right? Pay a deposit to lock in a “low price” today and sit back with “no holding costs” for years while the land goes up in value. Bold claims are made about the strategy being “low risk” and offering high long-term “proven” returns!
Is there a catch? Find out how much similar blocks of land have been sold for in the area. In other words, look for comparable sales of similar properties in the area so you can judge which values to take seriously and which to ignore…
Land has no value until it is sold…so if you buy a new plot of land from a development, the land has never actually been sold right? In reality, only until the land is sold after you sell it on the market that you will find out its true value.
Land Banking Strategy