Is it a good idea to invest in bare land?

 

There’s an old adage in real estate that goes:

“It’s not the house that increases in value, it’s the land beneath it…”

Meaning, the land is the scarce resource that actually represents the majority of the value in any property asset. Technically, the structure on top of the land actually depreciates (drops in value) over time as the materials wear down.

We buy houses based on their features, but in reality, what we are paying for is the right to live on the piece of land that house sits on.

So, does that mean that buying an empty section would make a smart, relatively care-free investment? The answer is, it depends. Here are a few key points to consider if you want to add ‘land-banking’ to your list of investments.

Saleability & Liquidity

In a hot market, buying land always looks like a good idea. It’s not uncommon to find stories of sections going up in value by hundreds of thousands of dollars in a few short years, especially in the main centres. But real estate investors and salespeople who have been around a while know that in a down market, bare land can be hard to sell, with sections often sitting on the market for months, garnering little to no interest.

Potential buyer market

Part of the reason why sections can be hard to sell is because the potential buyer market is limited. You need to find a buyer who has the funding, flexibility, vision and patience to build brand new. Someone who can take a blank canvas and turn it into a liveable home.

Banks know this too and are sometimes reluctant to lend money against bare land unless there is an actionable plan in place to build a home on it in the near future.

Ongoing cost

Bare land is not an expense-free investment. There will be local authority rates to pay, and maintenance costs if the grass needs to be mown occasionally. If you borrowed money to buy the land, then you will have mortgage interest costs, too.

Conversely, if you paid cash to buy the land, then there is the opportunity cost of that investment. Specifically, the return you could have received if you invested that money somewhere else.

You’ll be hoping that the increase in value of your block of land goes up enough to cover these costs and more, but you won’t be able to realise that value growth until you choose to sell that land.

Unlike a house (which you can rent out) there is little possibility of earning a return from your vacant land during your period of ownership. So you will need to have a way to pay those ongoing costs for as long as you choose to own the land.

But what about the upside!

As we alluded to at the beginning. Land is a finite resource. They aren’t making any more of it. And most of the best features of any property are related to the land it sits on: Sun aspect, views, access, proximity to amenities.

Buying bare land gives you an opportunity to secure your ideal spot for future benefit, even if you don’t plan to build anything there in the immediate future. You might buy a section in a small town you want to move to one day, or near a school you want your kids to go to when they are older.

Some sections also have potential to be subdivided in future, especially if you expect a zoning change at some stage. Buying rural land on the edge of expanding suburbs can pay off massively if you are prepared to hold the land long-term.

In summary

Before you jump into any bare land purchase, seek expert impartial advice. It’s critical to speak with an experienced lawyer before going ahead, especially if the title/deed hasn’t been issued yet, which is common when buying sections.

If you are looking at buying land strictly as an investment, consider your alternative options alongside that decision, including buying an existing home that you can rent out to help cover any costs of ownership.

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