Is Land Banking in real estate Good for You? Important Benefits and Risks
Land banking is an investment structure in real estate involving purchasing of large tracks of land which are not developed and later sell it at a profit. On the other hand, a land bank is a bank providing financing for developing land or farm mortgages. .In some cases, it is known as real estate investment schemes. Normally, real estate developers buy the land, subdivide it and sell it to investors who have two options: buying a plot or acquiring an option to purchase a plot of land.
Investors in this investment strategy, always project the future of an area and with the rising demand for properties close to urban centers, they buy at affordable rates and sell at a profit. This mostly happens in suburbs of major cities. In most cases, land banks purchase vacant and residential land.
This investment strategy dates back to over 500 years ago when John Jacob Astor bought a huge tract of land in Manhattan, later on, he sold it at a huge profit.
Benefits of land Banking in real estate
This old land banking practice has numerous advantages for investors. However, this investment has its own risk just like any other investment. But still, the benefits outweigh the risks. For those wondering whether land banking is a good investment, read one to get more information and insights.
Low maintenance
This investment has little or no maintenance, no taxes, or insurance. Further, it does not require huge financing in comparison to other real estate investments
High profits
When you invest in the right location, appreciation is a must enjoy for this type of investment. Further, despite the value of land rising, you can at some point develop the property and reap even a good income from the investment.
Requires fewer finances
For land banking beginners, the amount of money required is low in comparison to other assets. If you do not have a lot of finances, you can begin investing in this category and grow your way up.
Risks of Land Banking in real estate
Every kind of investment has some form of risk. This also applies to real estate and land banking as well. In land banking, you can make a profit and also generate passive income. In this article, we are going to share a number of risks you need to be aware of when it comes to land banking.
Financing
Getting financing to purchase your first land bank and maybe maintain it could be challenging as financial institutions see it as a risky venture. This is because the returns are pegged on futuristic appreciation of the land.
Planning
Receiving the necessary permits from local governments to develop the property may be challenging to most investors. In most cases, land planning falls under agricultural, residential, recreational, industrial, and transportation. Depending on the zoning of your property, as the land owner, you have the sole responsibility to get the right approvals.
Ecological issues
Some of the environmental issues affecting land include declining productivity, deforestation, soil pollution, siltation, loss of amenities and species, etc. These ecological issues in addition to other disasters have a negative effect on the profitability of your land bank.
Real estate crash
A real estate bubble is also known as a housing bubble or a real estate market crash. This is where there is an increase in the prices of real estate as a result of demand and speculation. However, it causes high-spirited purchases of real estate products leading to a market collapse. When this happens to land banking investors they suffer losses because the housing prices reduce significantly.
Sudden changes in the market
Appreciation of land banking type of investment largely depends on the environment in an area and growth of population, overall market trends, and prevailing economic policies. Supposing one, two or all of the above factors change, a particular area may not be ideal for investments. What this means is that the land bank will not be profitable at all.
Irregular cash flow
The cash flows and profitability of land banking begin once the land is either developed or appreciated. In addition, this takes time and is not instant making it a long-term kind of investment.
Land grabbing
Land grabbing is the acquisition of land fraudulently or by force. Further, the land grabber tends to also transfer the land title deed illegally.
Some of the causes of land grabbing in Kenya are corruption, lack of political representation, and a weak rule of law making it challenging to obtain justice. The best way to deal with land grabbing is to file a case in a court of law. In most cases, the punishment for land grabbing is imprisonment and recovery of the land and restoring it to the original land owner. As a land owner, you can protect yourself by educating yourself on land grabbing act so that you know your rights.
Longer waiting period
To begin with, land baking takes time even years to yield results. This can be a risk to an investor who was pegging hopes on this investment. It is a common saying that time is money and when you take a longer period before an investment brings profit it may be counted as a delay.
Failure of approvals
As mentioned earlier on, land baking depends on various zoning approvals by local governments. However, zoning and approvals largely depend on government plans. For example, some properties will require changing the use of land for example from agricultural to residential property or residential to commercial land. All these largely depend on approvals by the government and lack of it means as the land owner you will not get the profits you planned for.
Misleading plans
Some of the plans that some land developers share can be misleading to potential investors. In some cases, the approvals may still be under review by local governments and yet to receive approval. This means that when an investor buys these properties the hopes are on the basis on perceiving ideas and not a factual premise.
Being misled by concept plans
Often, developers offer investors the ‘option’ to buy a plot for an initial option fee on the basis of concept plans that are not officially approved. However, it is important to know that a concept plan is only a representation, and not a promise, of what the sub-units or plots would look like in the future.
Lack of regulation
When investments lack official government regulation, it becomes very risky. Therefore, investors need to exercise some level of caution when investing in such a scheme to avoid losing money their money.
Land banking fraud
Apart from risks, some fraudsters take advantage and come up with land banking fraud. As always, prevention is better than cure, you can take up some measures to protect yourself from land banking frauds. Below are some quick ways how to avoid land banking fraud
- As an investor, seek financial advice before putting your money in a land banking scheme
- Contact a local government authority when you need to buy land in a particular area
- Research well on all land banking schemes before settling on one
- Do a background check of the land banking company
- Read and understand all statements in the sale agreements by the developer
- Get an independent conveyancing lawyer to advise you on various legal issues
How you can Start Land Banking in real estate
You now have all the details regarding land banking, the benefits and risks. Would you like to start land banking now? The best thing with land banks is that you do not need a lot of money to start off.
- Cherry-pick an area
Land banking largely depends on potential in an area and the best location is near a city with great potential for development. Areas with upcoming highways, malls, children’s parks, high-end hotels, markets, and other key developments.
- Get a property at good prices
After getting the location right, the second step is looking for land at low prices. The easiest way is to find a land banking company selling land near major cities at low prices. When you find the best place you will easily become a millionaire.
Bottom line
Land banking is profitable and has benefits such as low maintenance, high profits and requires fewer finances. However, you need to be keen on the risks that come with land banking as mentioned in this blog. Do you have any questions on land banking? You can leave them in our comments section.