25 Apr The Pros and Cons of Making a Deposit In the Land Bank
Have you ever wished to yourself, “If only I had bought that property 10 year ago?”
You’re not alone. For some reason, you didn’t or couldn’t buy it then so the question is… is that property worth buying now?
If you have the means to do so, I encourage you to consider land banking as a way to acquire properties that you can sit on for a few years while you develop others, and strategically build up the ones that will generate the most revenue as the area grows.
Large developers do this all the time. You’ll see signs like, “future site of BlaBla Homes.” You know they’re going to make bank on that property… when the time is right to develop it. This ensures they have a sufficient stock of land for the future. This gives them time to deal with zoning, planning, infrastructure and utilities issues, and be primed for an explosion of growth.
For small developers, buying large tracts of land may not be feasible. But you can “land bank” by buying old houses or commercial structures that will likely be razed or completely renovated as an area grows. It’s all about doing your homework and being ready to buy, the instant a property comes on the market.
Land Banking Strategy
The strategy goes like this: choose the right location (one with potential); buy a cheap property that is rental-ready or has existing tenants; offset holding costs with rental income; add value to the site by obtaining property development approval (DA). Then when you’re ready – or when the market is ready – you proceed with developing the property.
Land banking is a good strategy because:
• Land typically appreciates; so even if you buy in at the current market value, you can expect that value to increase over time.
• You ride out the local property trends. You may see the potential in a property, but the market might not support it… yet. But as the tide changes, and it always does, you will be poised to develop the property quickly and get in on the leading edge of local development, especially in urban renewal areas.
• While you hold it, you are adding value (such as a DA for multiple dwellings), which will make it easier to sell if you need fast cash or if you need to refinance it before you continue with the development process.
It can also come with risks:
• Land prices do fluctuate, even though raw land is becoming scarce.
• The real estate values could be headed for a slump.
• Interest rates and property taxes can make holding costs unsustainable even with rental income.
• The property may need upgrades and repairs immediately.
• You may not be able to utilise the property in the way that you envision: many properties are simply not suitable for development.
• Lenders may not have the same vision as you, especially in areas that are not yet experiencing growth.
• You may have trouble securing other loans
If you are considering investing in downtown areas or the suburbs closest to already dense urban areas, there is virtually no raw land for future development, just existing developed properties. There is increasing demand for higher-density housing, particularly for young first-time renters, single urban professionals and Boomers who are looking to downsize. That means: limited potential property and increasing future demand.
Since not all properties are suitable for the type of development you envision, what is your best course of action when you are considering land banking? Talk to people who can guide you. There is no benefit to guessing or making decisions without consulting people who know the area, the market, its future potential, and who can counsel you on the development possibilities of a property.
Schedule a chat with Neal at White Gorilla Developments today, to find out of that property you’ve been driving by for 10 years is right for you!