Still reeling from the financial crisis, many middle-class Americans are clamoring for tangible, less liquid assets and turning away from Wall Street products (stocks, bonds, CDs, and similar investments). Perhaps because real estate offers a glimmer of familiarity, many people are using their investment funds and leverage to purchase developed real estate. In fact, when most people think of investing in real estate, they think of purchasing apartment buildings and houses, collecting rents, and waiting for those investments to appreciate. They don’t think of buying pre-developed land.
However responsible these investors may be, their investments aren’t as secure as they think. The recent financial crisis was, above all other things, a housing crisis. It was proof that housing prices can be as volatile as the stock market is – you can’t depend on developed property to appreciate; in fact, it might depreciate. These considerations bring us to the reasons land banking trumps other real estate options when it comes to investing.
1. Almost no risk of depreciation.
Unlike developed land, land in the path of development almost never depreciates. In the worst case, it gains value slowly over time. In many more cases, it appreciates tremendously and promises strong long-term gains.
Why is that? Land, unlike houses, doesn’t depreciate, because there isn’t going to be any more of it. Buying a parcel of land is buying a part of a finite resource. But land banking isn’t just buying land (as is commonly misunderstood): land banking is buying well-researched land that is in the path of development. Over time, this land will appreciate, because developers will build other assets on top of it.
2. Less work.
When you invest in developed real estate, you must manage your property (or hire a property manager), taking responsibility for problems like leaky roofs. You must also manage tenants, maintain legal permissions, and constantly juggle incoming cash and leverage. Though developed real estate is a long-term investment, it carries daily costs that not all of us have the time or desire to pay.
Land banking, on the other hand, allows you to invest safely for the long term and then put your investment (almost) out of your mind. While investing in developed real estate brings excitement (and sometimes havoc), land banking brings peace of mind. When you purchase a parcel in the path of development, your job is to wait for the development and take advantage of the appreciation at a time that makes sense to you.
3. More high-return opportunities.
How does land banking offer better opportunities? Within your own lifetime, you may have seen a small town turn into a much bigger one through municipal expansion, population growth or rezoning. These changes are dramatic, and the value of a land parcel pre- and post-development changes accordingly. The return on land in the path of development after sale is higher than the return on “flipped” real estate. In other kinds of real estate investing, business acumen and strategic use of leverage can pay off; land banking pays off even in the absence of those. It’s a logical choice for an opportunistic investor.