What is land banking?
Land banking is a property market scheme used by real estate investors and involves identifying and buying undeveloped land from land banking companies, to increase its value over time through holding, rezoning and developing. Common procedures in land banking includes dividing the land up into smaller lots and offering to various investors.
For an investor, the objective is to purchase the plot of land for the current low price and hold it while it’s being developed and increase in value. This occurs through many different stages of capital growth e.g. when the population/housing demand sees rezoning occur, creating new suburbs, roads and infrastructure. By purchasing plots of land at a low, pre-development price and holding blocks of land has helped many developers make big profits in a rising market once it’s been developed.
The advantage may seem obvious – you buy land at a low price, wait, and sell at a much higher price when the time is right. And yes, in basic terms that’s the benefit. Investors can double or triple their money if they have patience enough to wait for the price of the property to appreciate.
Investing in real estate is nothing new and land banking has been a profitable activity for many people for over 500 years. It has gained popularity in recent years especially as it allows investors to profit in more than one way depending on the market, opportunity and individual circumstances.
There are different property wealth accelerators used in land banking that, when combined, generate substantial profits for investors. Land banking does not only include purchasing a property that will appreciate with time, but you can earn premium rates by selling the land to property developers after securing development approval from the local council, or hold your properties until market conditions become favourable.
The limited supply of new and potential property development sites combined with a growing population and need for more housing make land banking an attractive investment strategy for many.
Risks of Land Banking
No reward without risk, right? Right!
Even though there are many investor success stories from land banking schemes, they don’t always have a happy ending. The biggest problems with this type of real estate investment relates to what type of project (if any) can fit on the land. It’s not unheard of that land developers sell land without knowing whether they can get council approval to develop.
Other issues less common include the ‘sunset clause’ – a clause that ends the scheme if the land fails to be rezoned or developed. The time window is usually 20-25 years but means investors lose the fee they paid if there’s not enough money to repay all option holders after this time.
Unfortunately, just like in most other sectors scams are real in land banking, too. Some developers are selling options in land they do not own. You need to do your due diligence before investing if you want to protect your investment from a land banking scam.
Investing in a land bank program with DomaCom is a sound investment due to the DomaCom Fund is a registered Managed Investment Scheme, which means investors do not:
- have day-to-day control over managing their investment,
- the scheme involves pooling investor funds, and
- the funds are used to further the development.
You can check ASIC Connect’s Professional Registers to see if the developer and the promoter hold an AFS licence.
Land banking with DomaCom
Are you looking to take advantage of real estate opportunities in Australia?The DomaCom Fund works as a vehicle that will enable a number of investors to acquire an area of land zoned for rural or agricultural use that will, due to growth in the urban corridor, eventually be rezoned to residential.
Invest in one or more properties of your choice with DomaCom’s fractional investment platform. Individual investors, families and friends, and SMSFs are invited to participate in these property investment syndicates, available across Australia.
View current syndicated investment opportunities and apply online. You should always get independent legal and financial advice before investing.