How many times have you thought of the money you could have made when you drive by a property that was on the market for half its price only a few years ago?
Most people would buy more property five years ago if they had known their money would double.
In five years, how would you like to own a prime piece of development property that you bought for a fraction of its current value?
Land banking is a strategy in Australia that many professional real estate investors and developers use to profit, and it can work for you too.
How Does It Work?
Land banking is the process of securing future property developments at the current market value. As the prices rise, investors cash in. There are several variations on the theme, and many investors use a second mortgage to help them purchase potential development sites.
Many of the world's largest development companies buy large farms, tracts of land and vacant houses to ensure future profits. The sites are put into a land bank to ensure an ample amount of property is ready for future developments. Most of these companies are large firms that have the capital to install roads and infrastructure. For the highest returns, developers divide the large tract into smaller building lots.
It is true that land banking has been used by many large and small developers to realize tremendous profits. Unfortunately, the same approach has caused numerous investors to lose millions when the real estate market takes a plunge.
Land banking is an ideal strategy for large investors and development companies, but it also works for individuals and small buyers. I have used the strategy successfully numerous times because I keep my expenses minimal so I can afford to hold property for the highest returns.
My approach — I do not buy vacant tracts of land.
I buy old houses that are reaching the end of their lives. I concentrate on homes that are well located and have huge potential for future developments. I also work in the top suburbs where demand is going to rise over the next few years. While I rent the homes, I can offset my holding costs. Sometimes, I even make a profit from my land banks. While waiting for developments to come, I begin to obtain development approval from the local city or county council to add value.
Why Does Land Banking Yield Higher Profits?
Many real estate investors have earned their fortune with land banking because they add value to their properties to accelerate their wealth. Here are a few ways to benefit from land banking.
- Land values rise - we know that land is available in a limited supply. There is no more being made, and the value of property is bound to rise with increased demand.
- Adding value - adding value to property is a great way to improve the final sale price of your land bank. Development approvals for subdivisions or multi-family dwellings are an ideal way to add value and make your site more attractive to developers.
- Ride the property cycle - securing great sites in soft markets is one of my preferred strategies. During times of low demand, property prices are incredibly low, and this allows me to buy low and sell high. When the real estate market rebounds, and it will, my position allows me to sell for an impressive profit.
Land banking is a particularly effective strategy in the middle and inner rings of capital city suburbs. In most of these areas, there is little vacant land, but demand is rising. Because future developments are medium density, a single lot is easily turned into a dozen.
Article written by Anna Kec on behalf of Easy Settle Finance
- Friday 17 August 2012