Alternatively, undeveloped land that isn’t yet approved for development can also be subdivided and options to buy can be made available to investors. The option to buy becomes activated once there is council approval for the land’s development.
Land banking is a common investment strategy for developers. It allows land to be sold at a profit when it’s rezoned for development. The land could be rezoned as residential property, commercial property or mixed use.
The most important factors are the location of the land and its suitability for high quality development that will generate investor demand. You should always thoroughly check your land’s suitability for the development project you have in mind before you buy it. For example, does it have the right soil conditions to make it easy and cost-effective to build on?
Land banking FAQs
Do you have to be a big developer to start land banking?
Not necessarily, you can start off on a small scale. In fact, you probably should so that you get to understand what’s involved in terms of getting council approvals. This should give you the experience and confidence to explore larger-scale projects.
What does a managed investment scheme mean in relation to land banking?
Managed investment schemes must be licensed by Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC). Your land banking scheme will need to be licensed if:
- you pool investor’s funds,
- these pooled funds are used to further your development project, and
- your investors don’t have control over how their investment is managed.
What is a comparison rate?
A comparison rate is the cost of interest plus any loan fees and charges. Lenders in Australia must advertise their comparison rates on their loan products to comply with the provisions of the National Credit Code. That’s why you usually see two interest rates advertised on a loan product.
The comparison rate will be a higher rate than the nominal rate, which only includes the cost of interest. Always use the comparison rate when comparing different loan products so that you know the full cost.
What is a loan-to-value ratio (LVR)?
The LVR is the value of your loan expressed as a percentage of the property you want to buy. For example, if you want to borrow $1.6 million to buy land that’s worth $2 million, your LVR is 80% (i.e. $1.6 million divided by $2 million).
If you have a deposit less than 20%, you’ll usually be required to pay for lenders’ mortgage insurance (LMI). This can be a significant cost and should be considered in the cost/benefit analysis for your land banking project. LMI protects the lender if you don’t make your loan repayments.
You can lower your LVR by providing your lender with a higher deposit.