Whether it's an abandoned property or a new subdivision, land banking can be a profitable form of real estate investment. Here's everything you need to know to get a land banking loan.
Making money from a plot of undeveloped land appeals to many investors, but it requires patience. You can potentially double or triple your money if you're prepared to hold on and wait for the price of the property to appreciate. To see that return on your investment, a land banking loan might be where you can start. Find out what’s available.
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What is land banking?
Land banking refers to the practice of purchasing land based on its potential for future sale or development. If you engage in land banking as an investor, you will typically purchase a property and hold onto it until the price of the property appreciates. Then you can sell it for a profit – this might involve waiting until market conditions are favourable.
How does land banking work?
Land banking typically involves:
- Acquiring the title to vacant properties or properties that show potential for profit;
- Making necessary payments to make the property ready for redevelopment;
- Holding onto the property or increasing its value by improving infrastructure and;
- Transferring ownership to the new owners once the price appreciates.
It is worth noting that the above won't always happen – a decrease in real estate values means some investments will result in a loss.
What kind of loans can you take for purchasing land banks?
- Development and construction loans.
If you’re looking to construct a commercial property, sub-division or residence on your land, these loans let you repay once you complete and sell the development property.
- Commercial property loans.
Banks and financial institutions offer commercial property loans to help you finance various real estate investments, from vacant land to abandoned properties.
- Land sub-division finance.
Builders and contractors often sub-divide properties into industrial units, small sub-divisions, spec homes, multi-family units and so on to meet property requirements. These loans typically cover the cost of the land, the engineering and infrastructure works and refinancing the completed project.
- Mezzanine loans.
If you have insufficient financing from a bank loan, mezzanine financing can help cover additional development costs. These loans aren’t offered by traditional banks and tend to come with higher interest rates, although a better interest rate may be available if you use the property as security.
- Rural property loans.
These loans are ideal for builders who purchase rural property to sell as hobby farms or residential homes.
- Agricultural land bank loans.
Not all developers engage in land banking for urban development. You can also invest in tracts of undeveloped land that is ideal for agricultural purposes, which can be financed with an agricultural land bank loan.
Land banking promotes development and helps meet real estate demand. However, risk is involved, so it pays to compare your loan options before investing.
Frequently asked questions investors have on land banking
What are the merits of land banking as an investment strategy?
Investing in real estate has been a profitable activity for many people. You could potentially:
- Gain profits from purchasing property that will appreciate with time
- Earn premium rates by selling the land to property developers after securing development approval from the local council
- Hold your properties until market conditions become favourable.
What are the essential features of a property that has good development potential?
If you’re interest in land banking, knowing the key features of a good real estate opportunity is essential. A tract of land suitable for land banking will:
- Be level or usable
- Be near a growing metropolitan city
- Have a master plan that features streets, roads and pipelines for sewers, electricity, water, and communications services
- Have an abundant water supply
- Be conveniently located or easy to reach by road, rail and air
- Have various utilities for fostering growth nearby such as educational institutions, hospitals, industries and so on
When should you consider taking out a land bank loan?
If you have a property, you might need a land bank loan:
- When you require development approvals
- In case of insufficient pre-sales
- If you need to make amendments to your development application
- If you plan to amalgamate with another site and,
- If you your property requires rezoning.
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DISCLAIMER: The comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information applicability to their own particular circumstances.