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Is It Land of Plenty or a Money Trap?

Is It Land of Plenty or a Money Trap?

You won’t get rent from it, but can you get rich anyway? Amy Hamilton Chadwick finds out if it’s worth investing in undeveloped land.

8 March 2022

Can you get rich from investing in land? Maybe – but it’s really what you can do with that land that counts.

While the cashed-up super-wealthy can potentially spend tens of millions on land that generates no income, that’s just not realistic for the ordinary Kiwi investor.

So, how can you make money from land, and is it worthwhile?

Layer up your profits

You can make money from land at any stage (remember these profits may be taxable).

Speculation: You can make money by buying now and selling it later. For example, you might have bought a $500,000 section and then sell it two years later for $600,000. You’ve made $100,000 and your costs have been negligible – probably just transaction fees and the cost of the mortgage.

Develop the land and sell it: By developing the land to be more usable, you can add value and make a better return. Consider that $500,000 section. If you drew up plans for three townhouses and spent $70,000 on infrastructure consents, now it’s ready for anyone to develop it. You might sell it for $750,000, a $180,000 gain.

Become a developer: By developing houses on the land and selling or holding them, you can maximise your revenue. Let’s say you built three townhouses on your empty section, at a total cost of $1.2 million. You sell each townhouse for $750,000, so you’ve made a total gain of $550,000 after subtracting your $1.7m land development and construction costs.

Each stage makes money, and the more stages you layer up, the more money you’ll make from the land. That’s your reward for taking on a risky, capital-hungry enterprise that doesn’t produce an income for many years.

Extra land doesn’t mean extra growth

It’s not easy to make money from bare land – ask any farmer. As a result, buying land is expensive, but it doesn’t go up in value at a faster rate than homes do.

Townhouses, which generally have smaller sections, for instance, generally gain value at the same rate as standalone homes, according to research by Opes Partners.

That data showed any property with more than 100 square metres of land gained value at the same rate – extra land didn’t mean greater growth.

So, should you buy a townhouse or a standalone home on a section? It all depends, says Steve McMenemy, Director at Loan Market Development Finance, a highly experienced developer.

“If you want a lock-up-and-leave, go for the townhouse. If you’re an investor looking for future upside, you might buy the standalone home on a full site with some upside.

“It will all be budget dependent, but for most sites that are zoned residential and have a storm water solution, you can probably do something with it.”

Buying to subdivide or develop

Buying a site large enough to develop into several townhouses can be a great investment in the right area.

McMenemy recently sold an Auckland site that he’d bought with the intention of developing.

He and the next-door neighbour were able to sell both their sites to a developer who was looking for exactly that sort of that project.

It was a quick win for McMenemy because the market has risen so much, although he points out that developing it himself would have been more profitable.

The best land profits come from building several dwellings at once, but it’s a serious undertaking and it’s risky.

You’ll need to deal with specialist non-bank lenders, who charge higher interest rates but can be very flexible – and it can be highly stressful.

One option is to partner with a builder like Sentinel Homes or Ashcroft Homes that uses well-oiled processes to make it all run smoothly.

The quality and experience of the builder are a consideration for the lender. It’s also a good idea to engage a specialist broker because development and construction lending is very different to residential lending.

Owning a house on a large section and subdividing it to build a second house or minor dwelling can also be profitable.

Because it’s a small project, your bank will probably lend you money to do it. But do your sums before you buy: will the extra cost of the additional land really pay off?

A dream for the future

Do you have your eye on a dream spot for your grand design, retirement, or a future holiday home?

You might be thinking about buying a section in the right spot now, before prices keep rising, and then building on it later.

The upside is that you have perfect position for the future, but the downside is that you’ll pay holding costs for years without generating any income.

And building a single house isn’t likely to be a profitable investment strategy, considering the cost of building. It’s more of a lifestyle choice.

McMenemy says: “For me, it would have to be the dream section, otherwise you’ll probably be better off buying something that makes an income, like a rental property.

“The first thing you should do is talk to your mortgage broker and find out if you’re in a position to buy, or whether you’re in a sweet position and you can easily buy a section without any income.

“Then you can do some scenario planning on the numbers – plus there will probably be a lot of emotion driving it.

“If I fell in love with a site, and I knew I wanted to build in 10 years, I would just try to buy it.”

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