With land banking, you could potentially double or triple your investment by holding onto undeveloped land and waiting for the price to appreciate. While this requires some patience, land banking has appealed to many investors. If you’re considering land banking, there are a number of loans you can apply for.
Land banking refers to the practice of purchasing land based on its potential for future sale or development. It often involves a developer buying large parcels of undeveloped land, which can then be divided into smaller blocks and sold. 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. You can then sell it for a profit, although this may 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 required payments to make the property ready for redevelopment
Holding onto the property or increasing its value by improving infrastructure and
Selling the property and transferring ownership to the new owners once the price appreciates.
Just as land banking requires patience, it can also be risky. You may not always get a profit, especially if the real estate value decreases. You’re essentially banking on the future, which can be unpredictable.
What kind of loans can I take to purchase land banks?
There are a number of finance options you can apply for. These include:
Property development and construction loans. You can apply for this loan if you’re looking to construct a commercial property, sub-division or residence on your land. You can repay once you complete and sell the development property.
Commercial property loans. This loan is designed for the purchase of commercial property. Commercial properties include properties designed for use as an office, retail or industrial space.
Sub-division finance. Subdividing land can increase the value of the property without the need for further construction. These loans can be used for construction purposes too.
Mezzanine finance. You can use mezzanine finance to complete a project or an expansion or to borrow additional capital. This type of loan is used when a bank loan doesn’t cover all your finance needs.
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 invest in tracts of undeveloped land that is ideal for agricultural purposes, which can be financed with an agricultural land bank loan.
How can I compare land banking loans?
When you’re comparing loans, here’s what you need to watch out for:
The interest rate. This is how much lenders will charge you for borrowing and will vary from lender to lender. It can be influenced by risk to the lender. How much you pay in interest will affect your monthly repayments and the total cost of the loan. Comparing interest rates is a good way to check if the loan is competitive.
Fees. You should also watch out for fees. This includes application fees and account-keeping fees. They will add to the cost of your loan. Some loans may not charge fees for additional repayments or early exits, but others may. These will vary between lenders, so make sure you account for them.
Maximum LVR. Find out how much each lender will let you borrow. This will determine the size of your deposit.
Borrowing amounts. Lenders will have maximum and minimum borrowing amounts. Make sure the amount you need is offered by the lender.
Loan term. This is how long you have to repay the loan. With shorter loan terms, you can expect higher monthly repayments. But with longer terms, you pay more in interest and fees.
Repayment flexibility. You may be able to adjust repayments according to your cash flow or make interest only repayments for a certain period. Additional features. Check if the loan offers features which allow for further flexibility. For instance, can you make additional repayments without incurring penalties. Can you then access these additional payments through a redraw facility?
How can I apply for a land bank loan?
🤔 Work out what type of loan you need, how much you need to borrow and what you can afford.
🔎 Start comparing lenders. Apart from the services they offer, don't forget to compare interest rates and fees.
✅ Select a lender. If you’re using Finder’s comparison table, click “go to site” to be directed to the lender’s page or “more info” if you want to read about the lender.
🖨️ Organise and prepare the required documentation.
📱 Apply. Most lenders have their applications online.
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Frequently Asked Questions
Investing in real estate can be profitable. With land banking, 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.
However, land banking requires some patience and is not without risks. You should always do your research, look into whether the land is likely to be released for development and read up on the scheme you’re signing up for.
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.
Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
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