Land Banking Property
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
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.
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.