Hi everyone!
Thanks Marisa for sharing my recent blog article on "The WORST Property Investing Advice EVER!" - it's great to see the lively discussion that the post has stimulated.
I thought I'd jump on and add my 2c worth to some of the points and questions that have been raised.
Let's start with the question of strategies like land banking...
There are a couple of variations on the 'land banking' theme that need to be addressed here:
1.) Finding a site with rezoning/redevelopment/growth potential yourself, that you believe you can purchase at a particularly low price today relative to similar properties, and where you have a clear and confident expectation (based on facts rather than speculation) about what will happen to the value of the site within a specific timeframe. (For instance, if you have verifiable information on a committed plan to rezone the area from rural to high density residential within a defined timeframe).
The further out the anticipated timeframe is, the greater the risk that the anticipated change never eventuates, or the market changes adversely in the meantime and invalidates the original expectation/intent.
2.) The 'land banking schemes' heavily promoted by property spruikers, where a large developer has acquired an option over a large paddock (usually zoned rural) on the fringe of a city and intends to seek rezoning and ultimately development approval for a new land/housing estate in around a 7-15 year timeframe.
The 'proposed' lots in these schemes are promoted to investors on the basis of putting a $20k-$50k deposit down now, having no 'holding costs' for the next 7-15 years while the property goes up in value (because property values always go up and double every 7-10 years... don't they???) before the estate is finally rezoned, developed and ready.
These schemes raise a lot of questions, such as: What security does the investor have (none), where is their money (who knows), and what happens if the estate is never actually developed or the developer goes bust/disappears in the interim? Not to mention the fact that you really have no idea what the future value of the proposed piece of land will actually be when the time comes, or how over-supplied the are might be if other estates are developed at the same time. I've even seen land banking schemes promoted in the last couple of years where the price on the proposed lots was substantially higher than the price of equivalent existing blocks of land in the same area!
I would be extremely cautious about such schemes, as it's simply not possible to predict with any degree of certainty where the local property market will be by the time the estate is actually developed.
As you can probably tell from the blog article, I'm not a huge fan of speculating on the long term because of the additional risks this introduces, and typically wouldn't 'land bank' because of this (not to mention the opportunity cost of what else I could be doing with the money in the meantime to make it work harder for me, rather than sitting around waiting).
The only potential exception where I'd personally consider 'banking' land, would be if I found a great development site that stacked up on today's numbers, but I simply couldn't afford to develop it right away. In that instance I might consider 'banking' the land until I'd sorted out how to fund the development.
Cheers,
Simon
Thanks Marisa for sharing my recent blog article on "The WORST Property Investing Advice EVER!" - it's great to see the lively discussion that the post has stimulated.
I thought I'd jump on and add my 2c worth to some of the points and questions that have been raised.
Let's start with the question of strategies like land banking...
Would you exclude the strategy of Land Banking from the 6-36 month horizon?
There are a couple of variations on the 'land banking' theme that need to be addressed here:
1.) Finding a site with rezoning/redevelopment/growth potential yourself, that you believe you can purchase at a particularly low price today relative to similar properties, and where you have a clear and confident expectation (based on facts rather than speculation) about what will happen to the value of the site within a specific timeframe. (For instance, if you have verifiable information on a committed plan to rezone the area from rural to high density residential within a defined timeframe).
The further out the anticipated timeframe is, the greater the risk that the anticipated change never eventuates, or the market changes adversely in the meantime and invalidates the original expectation/intent.
2.) The 'land banking schemes' heavily promoted by property spruikers, where a large developer has acquired an option over a large paddock (usually zoned rural) on the fringe of a city and intends to seek rezoning and ultimately development approval for a new land/housing estate in around a 7-15 year timeframe.
The 'proposed' lots in these schemes are promoted to investors on the basis of putting a $20k-$50k deposit down now, having no 'holding costs' for the next 7-15 years while the property goes up in value (because property values always go up and double every 7-10 years... don't they???) before the estate is finally rezoned, developed and ready.
These schemes raise a lot of questions, such as: What security does the investor have (none), where is their money (who knows), and what happens if the estate is never actually developed or the developer goes bust/disappears in the interim? Not to mention the fact that you really have no idea what the future value of the proposed piece of land will actually be when the time comes, or how over-supplied the are might be if other estates are developed at the same time. I've even seen land banking schemes promoted in the last couple of years where the price on the proposed lots was substantially higher than the price of equivalent existing blocks of land in the same area!
I would be extremely cautious about such schemes, as it's simply not possible to predict with any degree of certainty where the local property market will be by the time the estate is actually developed.
As you can probably tell from the blog article, I'm not a huge fan of speculating on the long term because of the additional risks this introduces, and typically wouldn't 'land bank' because of this (not to mention the opportunity cost of what else I could be doing with the money in the meantime to make it work harder for me, rather than sitting around waiting).
The only potential exception where I'd personally consider 'banking' land, would be if I found a great development site that stacked up on today's numbers, but I simply couldn't afford to develop it right away. In that instance I might consider 'banking' the land until I'd sorted out how to fund the development.
Cheers,
Simon
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