Investing in land is a great move and can be substantial but only if you play your cards right.
Land, i.e., raw land, refers to undeveloped land usually without any property or a house built on it.
If you are not building anything on it, the banks see it as a speculative investment and it is quite possible, your home loan may not get approved. Discover how to qualify for that:
Benefits of Investing in Land
Compared to other investments, land does not require much of your involvement. Investing in land is like a passive long-term investment.
What’s More About It?
Well, you may be able to buy smaller pieces of land just with cash. Insurance, property taxes and maintenance costs are not too high. You can even take advantage of negative gearing benefits.
When the competition is low, you can get a good deal easily. People who have a limited budget can buy now and build later. This also ensures that they will not be priced out of the property market later.
Even though its value may increase slowly, land prices can hike overnight. Some people make investment in land thinking that the government will rezone it soon. Once rezoned, the value of land increases and that can be cold to a developer.
Once you buy land, it is your asset and you can choose what you want to do with it. Based on the situation, you can also sell it to a developer or even build it yourself.
However, at the same time, investing in raw land can get complicated. You should invest only if you are aware of what you are doing.
Do You Qualify for an Investment Loan?
Investment loans can be of higher risk. This is the reason it is difficult to qualify for one. You must be financially strong. You will also have to meet the basic lending criteria like:
- Deposit Requirements
- Genuine Savings: These savings are basically savings you have held or collected in the bank account for at least three months. You will need to have at least 5% in genuine savings. However, some might even require you to have as much as 10% in genuine savings.
- Equity: You might need to have equity in another property if you are borrowing more than 90% LVR.
- Good Credit History: Banks prefer borrowers who have little to no bad credit records. This also means your credit score must be above average.
- Stable Employment: Banks want to see that you can afford the investment loan. It means you would want to have a strong income with stable employment. If you are self-employed or if you are a professional investor, you would simply want a strong stable income.
How Much Can I Borrow?
The amount you can borrow depends on a number of factors. If you are only buying and not developing the raw land, you may be able to borrow up to:
- 60% LVR – For commercial farms.
- 70% LVR – For land blocks over 60 hectares or 148.3 acres.
- 80% LVR – For land blocks up to 60 hectares or 148.3 acres.
- 95% LVR- For land blocks up to 11 hectares or 27.2 acres.
If you are planning to build on vacant land, you can take out a cost-plus construction loan.
What to See Before Investing in Raw Land?
There are a lot of things to watch out for before investing in the land. You will also have to consider how the bank will assess the loan application.
Here are a few things you must consider before investing in land:
- Location and Zoning: Land inside or around major cities and regional centres are comparatively easy to finance. Even their value appreciates faster. If the land is on the bank’s list of postcode restrictions, you might not qualify for a mortgage. Zoning is important because of the restrictions on usage that are applicable in some areas. For instance, you cannot build a shopping mall in a residential area.
- Size and Shape: Big or spacious pieces of land take longer to sell. This is the reason banks do not prefer them. Even if you are buying with cash, you will still have to consider the size and shape of the land. The land can be slightly tilted or can even have a cliff or ravine. This can make it difficult to develop. This type of land may even take a little longer to appreciate in value.
- Infrastructure: This mainly includes road access and availability of public utilities like water and electricity. If you think of building, the land must have water, sewage services or septic tanks.
- Your Financial Position: Raw land is not usually a good choice if you are looking to re-sell for a quick profit. You will have to pay additional costs if you are planning to develop. This can include the following: surveyor fees, legal costs, installation charges and more. You will also have to prepare to pay taxes and mortgage repayments without any cash flow in return. To know more about the land taxes, check out the (ATO) Australian Taxation Office website.
- Property History: An affordable piece of land close to a regional centre may seem a good deal. However, finding out why it is selling at a lower price is also important. For instance, it might have been a landfill in the past but cleared up recently. The land might also have some environmental contamination. This can be especially in the case of commercially zoned areas.
It is advised to speak with a financial advisor before you take any big decision.
Investing in Land FAQs:
Common Ways of Investing in Raw Land
There are four major methods:
- Holding Land: You can invest in the land just by holding on to it. Once the land goes up in value, you can sell it to a developer. Please understand that note that timing is important because normally the value of land appreciates slowly.
- Handing It Over to a Developer: You can also buy land and then hand it over to a developer. By legally changing the zoning of the land, it can be worth a lot more to a developer. For instance, you can buy a piece of land in a commercial sector zoned for residential use. You can then legally change the zone to commercial through entitlement process. Later on, you can sell it to a developer.
- Renting It Out: A vacant piece of land i.e., raw land can be rented out to a business or a household. For instance, you can turn a piece of land into a parking lot and then rent it to nearby businesses. You can even lease farmlands to farmers or commercial businesses.
- Building: You can even develop the land by yourself or sell it later on.
Who Can Benefit from Investing in Land?
Home building companies can benefit from investing in land. Long-term corporate land investors with different land portfolios can benefit a lot. Their entitlement skills, development and experience can reduce the overall risk remarkably.
However, investing in land is considered high risk for small investors. This is because of the low chances of earning a fair rate of return.
For instance, smaller investors can buy a $450,000 investment property instead of a block of land. They can even turn their home into an investment. This way, they can earn stable rental income and benefit from capital growth.
If you are someone who is passionate about buying land/acreage, contact Raine and Horne, land Victoria.