Land Banking Property
Investing Strategy
Buying empty land and holding onto it as a growth investment.
Keys to make it work:
- Ability to finance the holding costs
- Knowing where the high growth, high demand areas are at
- Finding the buyers
- Setting the right price for the sale
Financial Requirements:
This type of investment strategy shall only be used by investors who are strong in income and does not have problems in serving additional debts.
Time Frame and Exit Strategies:
This type of investment varies, from a couple months to a few years, depending on the speculated growth aimed for by the investor. There have been good buys seeing value increase dramatically in a short period of time. Investors will need to either sell the land or refinance to realize the cash gain.
The Return Perspective:
Land itself produces no income and therefore is going to be a negatively geared investment. If the growth on such an investment is large enough, the benefits can clearly outweigh the negative short-term impact on cash flow.
The Advantages:
If bought in the right expansion area, the value of the investments can easily realize capital gains of 5-10 times the initial investment within a relatively short period of time. Small investors could use this strategy when buying residential blocks of land from developers.
The Potential Risks/Difficulties:
Investors must be aware that if the market experiences a downturn, they need to be prepared to sell the land at a loss or continue holding the negative cash flow until the price rises. Purchasing land for growth speculation involves a higher risk than investing in a property that is able to produce an income before exiting the investment.
The gearing ratios on this type of investment are normally quite low, generally between 40-50%. Investors need an ample amount of cash they are willing to put aside and wait a certain time frame for the predicted expansion to happen.
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