Are you planning to buy a new subdivision lot or an abandoned property? Regardless of the type of property, land banking is a profitable investment. The problem is in getting the money to purchase it, because not all borrowers are qualified for a land banking loan.
Here are some of the reasons why borrowers apply for land banking loan:
- The vacant property shows potential for profit. You are acquiring a title of a land which has the potential of giving you a profit. While owning raw land does not always provide a cash flow, you can improve it and sell it for a higher value. But remember that the problem with this kind of investment is that it eats up money, as you have to pay real estate taxes on it each year. You also have to spend money for its upkeep and maintenance while waiting for it to create an income. The only time it creates income is when you rent it or sell it out.
- The land banking loan will be used for preparing the property for redevelopment. What will you do if the raw land lies along an area with expanding economic growth? You will develop it, right? Investing in raw land only brings its best return when it falls within the fundamental law of supply and demand. Are there enough land areas in the place to accommodate commercial establishments or residential homes? Your raw land should meet a need for it to be a part of the area’s development. If the area will benefit from economic growth, promising demographics and future use, increases in land value are virtually possible.
- The borrower intends to keep the property or increase the land’s value by improving its infrastructure. Why do property values in certain areas increase? Infrastructure projects such as streets, road widening, and establishment of commercial and industrial areas typically increase the value of properties. The more accessible it is to public transport, the higher the value gets. But, there are certain infrastructure projects that you can do to augment the value of your property. Some land owners build fences, water sources, and beautiful landscapes.
- When the price of the land appreciates, the borrower intends to sell it or transfer its ownership to new owners. Some investors buy lands just because they are cheap enough, while others look into its future use.
The market dynamics for land and houses are not the same, as these buyers have different needs and perspectives. While home buyers want a place to move-in, with functional kitchen and comfortable rooms, land buyers want the most appropriate location for their needs.
So, if you intend to sell your land after some time, you may be thinking about working on the first impressions. For one, you may spend money on cutting the grass, removing garbage and giving your land a clean and fresh look, not just for marketing photos but for visitors who will drop-by. You may have to spend a little bit of your cash to stage your raw land and make it appealing to the next owner.
What are the essential features of a property that lenders look for when granting a land banking loan application?
Lenders look for lands with a good development potential or one that can provide good real estate opportunities for the borrowers.
Lenders will qualify a tract of land appropriate for land banking if it has the following features:
- Level or usable. It is a land area where you can put buildings, or any infrastructure project that would meet a specific need. Of course, you will not be confident in selling a raw land which is muddy, or steep and rocky, unless you plan to convert it into a nature’s trek garden.
- Near a developing metropolitan city
- It has a development master plan that includes roads, streets, communication services, water and electricity and other essential features of a habitable and bustling area
- It must have an adequate supply of water
- It is accessible. It must have access to main roads, railway system, airport and other modes of transportation
- It must have growth-oriented utilities such as market places, schools, hospitals and commercial industries
Why is land banking practical?
Land banking is a profitable investment strategy for many people. When used wisely, investors can gain profits from purchasing lands that will appreciate in value over time. Some people, who do not intend to keep the property for a long time, sell them to property developers at premium rates right after obtaining development approval from the city council. Others hold their properties until they can sell it off when the market conditions get better.
Do you want to know if you are ready to get a land banking loan? Ask our in-house loan experts at ALC Commercial today!