How Does Land Banking (Speculating) Actually Work?

[kmor110]

Hi all,
In theory, say that you are investigating purchasing a property next door to a property you own. You are effectively speculating on their future value as a package. For example, the mortgage payments on a roughly 800k residential property, with rental potential of about 32k p.a. is negatively geared unless you inject about 50% equity. Surely the opportunity cost of this capital 'today' is more than what the unknown potential value of capital gains could be?
I understand this is probably a complex and subjective topic, but interested to hear people's opinions and experience (if any).

[Wayne]

How does it work - expensively.
Mostly land doesn't generate income so you are relying on something else - capital gain?
Maybe you are expecting a re-zoning - speculation really.

[kmor110]

Hey Wayne, consider for this example that there is a dwelling generating limited rental income. You would need to inject 400k cash to get it neutral.

The two sites separately are not subdivisible, but combined there is another site possible. And yes, possibly Unitary Plan could increase that potential through re-zoning.

Do you get a partner with cash, do you top up the mortgage until rent increases enough, or just give it a miss?

[Damap]

Impossible to answer it comes down to your circumstances. When I was actively trading I would do exactly as you suggest, get the new packet surveyed to confirm subdivisibility then sell it to a developer. So your only cash outlay is the surveyor. Holding it waiting for capital gain before onselling or doing the subdivision is only "safe" if you have lots of income. But proving the increased value and selling it can be done before settlement.

[Cpt707]

Nonproductive vacant land is easy to buy, but hard to sell..with carrying costs and poor liquidity. In the South Island many vacant sections are on the market for years...

[donna]

You can get lucky with it and Housing NZ have done well with that 24 ha block in Papakura (old army camp). They're selling off some of it to private developers after hanging on to it for 10 years and gaining $14 million in increased value. They're not selling the lot but what they're selling is going for market value.

Aren't Developers also land banking the land in those special housing areas?

cheers,

Donna

[PTILoveYou]

1) buy a piece of land (usually life style property like in Dairy Flat or Flatbush
2) wait for urban limit to expand and zoning changes
3) once subdivision rules relaxes, you can subdivide your life style land a lot more
4) profit, either sell to a developer, or develop yourself
5) better changes of return than a lottery...

However, the downsides are:
a) next to no rent
b) usually negative gearing
c) wait anywhere between 10 to 30 years (the earlier you buy the cheaper it is, but can you afford to wait that long??)
d) you can get quicker returns and build your portfolio quicker if you invest the right way in urban normal rentals
e) prepared to pay capital gains tax at sale

[Cpt707]

...buy when in primary school...the Cons out rule the Pros....then use your student loan to repair the fences...

[rocket]

Land Banking. ..hmmm!!
For a trader speculators with bit of a cash in hand is the best thing to do. If you have the ability to pay the mortgage.
Land always appreciates in a hot market, stays always in demand, can be built with new design,need no renovation,building report. You can onsell land with minimal hassle & maximum gains. ...
But this is for a stock standard section. ..but if you are looking at a 40 section subdivision then thats a different ball game.

[rocket]

Plus it should be in a good location. ....but if land banking for you means buying 2 acres in Tokoroa fringe or even in Drury then that's a gamble.
You are 200% safe if you can buy land in central akl or good suburbs amongst other houses.

[elguapo]

Aren't Developers also land banking the land in those special housing areas?

It seems so. Why develop and take all that risk when land banking is currently more profitable.