What Is Land Banking? Is It A Good Property Investment Strategy?

Land banking generally refers to the practice of buying land for investment purposes in the hopes or with expectations that the land will increase in value (capital price appreciation).

Whether it's a good or bad strategy really depends on:

1) Where the land is located and whether there is any likelihood of growing demands for that piece of land or that the land will be rezoned into higher density usage and therefore increase in value

2) The land's current or potential future use for income producing purposes

Growth in demand for land can result from subdivisions for housing estates, for industrial or commercial use and so forth.

I thought it's worth writing a post on land banking because it can seriously cripple your cash flow if you don't research the land before you buy and you don't prepare for the purchase from an accounting and tax perspective simultaneously.  

Failure to ensure that your land investment can produce an income as soon as possible will mean that all your related expenses won't be immediately tax deductible in that current financial year.

In NSW, Australia, if you buy land for investment purposes and the land is not producing any income, then all expenses such as loan interest, council rates, body corporate rates, water, maintenance and repair fees (such as repairing fences) cannot be claimed each year as tax deductions. They are added to the base cost of the land to reduce capital gains tax when the property/land is ultimately sold.

If you wish to buy land for investment purposes, the best strategy is to find one in a growth location (easy to say, hard to execute or else we'd all be billionaires), ensure that it can produce income in some shape or form so that your expenses are deductible in the year that they are incurred(this is very important from a cash flow perspective) and then cross your fingers in the hope that it will increase in value if you haven't done your research.

Some of our friends have practiced land banking rather successfully. They were delving into council development application plans, town plans, zoning plans and researching which rural areas were designated for growth corridors.

I do know someone who land banked unsuccessfully years ago. She bought a cheap piece of land in the bush that had no water, no sewerage, no power, no house, was rocky and dense with shrubbery and trees. Not only was it very difficult and very expensive to build a house due to the terrain of the land, but it was impossible to convert the land use to market gardening agriculture even if you bulldozed all the trees.

So building any housing structures were out, using the land for market gardening agriculture was out and using the land for grazing cattles or sheeps was impossible and unfeasible due to the terrain. What happened was that the land didn't produce any income, so she paid years and years of bank interest on the mortgage, paid fence repair fees and council rates faithfully without being able to claim anything as a tax deduction. The land was also in the middle of nowhere so there were no subdivision plans, no development plans and no demand for it so it didn't appreciate in value. It was only until she sold it years later, with no capital appreciation, that she was able to claim all the expenses that she had incurred over the years.

When evaluating whether land banking is a good investment strategy or not, given the right research and due diligence and forward taxation planning, it can be a good strategy. And if you fail to do any due diligence or research or planning, it can be a very poor one just like the one I mentioned above.

Don't Expect Results If You Don't Invest In Yourself

I am constantly surprised and baffled as to why some people just don't spend time on upgrading or improving their knowledge and skills.

Today was a classic case of people falling in the typical bell curve.

I had enrolled in a LF Forklift Licence course so that I could be licenced to drive a forklift around on my parent's farm and be covered by liability insurance in case I drive into something as a worse case scenario.

There were five of us in the class. Upon registration, we were told (and if you weren't told that, it was in the student handbook that you had to print out):

1. Print out your forklift training manuals
2. Read the training manuals beforehand a few times
3. Complete the questions in the manual
4. Complete the questions in the self assessment without looking at the manual and hand that copy into the training centre
5. Bring sufficient identification so that you can participate in the class

Today, this is what happened:

Person 1: Didn't bring sufficient ID. He lost his wallet a few weeks ago and brought in unopened utility letters and letters from the bank. (I was agog that they were not opened, as if he just grabbed them out of the letterbox). He didn't even know what type of letters they were but they didn't qualify. He didn't read the training manual beforehand and didn't complete the questions and didn't complete the self assessment that was to be handed in.

Person 2: He didn't read the training manual, didn't complete the questions, didn't complete the self assessment that was to be handed in. His written English wasn't that great according to his friends, but I'm surprised he didn't make triple the effort to learn the manual beforehand to compensate for his lack of written English skills.

Person 3: He didn't even print the training manual, let alone read it! He didn't complete the questions or the self assessment that was to be handed in. It's almost as if he just paid for the course, and then turned up on the day, ignoring everything else he was told.

Person 4: The only one on the top end of the bell curve. He not only printed two copies of the training manual, he had read the training manual beforehand so knew almost all the answers, he had completed the self assessment to be handed in and brought sufficient ID.

Person 5: Me haha! Of course I'd be at the top end of the curve ;p My practical forklift driving skills may be at the bottom end, but I did what I was able to do. I printed the manuals, I read beforehand, completed the questions, completed the self assessment, brought enough IDs and knew almost all the answers as well. Can't be too modest, right?!

Seriously though, I understand that driving a forklift can be considered a blue collar job but whether you are in a blue or a white collar job shouldn't distinguish how much effort you put into learning or obtaining skills. If any of my friends in the white collar industry (bankers, lawyers, IT consultants, programmers, accountants, dentists etc) had to obtain their forklift licence, I can say with 100% confidence that they would have followed the directions absolutely by the book.

They would have turned up on the day with 100% ID, printed off their training manuals and read it a few times, highlighted relevant points, made notes, completed all questions and if they couldn't complete the self assessment without looking at the answers, they would have studied the manual again. I can't say with confidence that they would pass the practical aspect of driving a forklift(without having practice) but I can say that they would have invested effort into achieving as much as they could to help themselves pass.

I have friends across various retail industries and professions, and I know we all fall into some section of the bell curve despite some denying that the bell curve doesn't exist. Probably for that reason, statisticians still have work and why we had to learn probability analysis.

But today, it was such a classic example of the typical bell curve that I thought I would write about it. It's been a long time since I was in such disbelief that people can turn up to a class and licence test without doing any preparation whatsoever and didn't follow any instructions or do any reading beforehand. I was just amazed.