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Investing safely in vacant land

Wednesday, 23rd Feb 2011

We all know that land appreciates and buildings depreciate. So common sense says that buying a vacant plot of land is a sure fire way to make money. While you can certainly make some good money, it’s not always the case so you must tread carefully.

Generally, vacant land is not a typical purchase for your average property investor. Why? Because there’s no rental return. Not only do you miss out on valuable income to help pay the mortgage, but you also miss out on a lot of the associated tax breaks as well. Secondly, vacant land can be a bit more risky. It tends to be more affected by market movements (both up and down), harder to sell, and harder to finance.

If bought carefully however, vacant land can work well as an investment. If the aim is to hold the land and then develop it in the short to medium term (or on-sell with development permissions), then it’s a strategy that can be quite rewarding. Some investors may speculate on land in an undeveloped area in the hope that one day it may get developed and provide them with a very handsome windfall (this practice is often referred to as ‘landbanking’). Although also very rewarding, gambling on a patch of dirt in the middle of nowhere is an incredibly risky strategy that in many cases will take in excess of 10 or 15 years and may never even pay off.

If investing in a vacant plot, try to buy land that is scarce and avoid areas on the outskirts where plenty of available land can continued to be developed. A waterfront plot or one in an already well-established suburb in the inner city would suit this criterion. Also do your homework thoroughly. Consult with a town planner and/or the council to ascertain what building restrictions and requirements would pertain to the plot before purchasing it. You should also consider the nature of the plot. Is it sloping? What’s the soil like? Is the shape easy to work with? The answers to these questions could greatly affect the resale value and the development costs involved and thus your potential profit.

While vacant land isn’t suitable for most investors for those with development in mind, vacant land can produce substantial rewards.