Should you invest in vacant land?

via therealestateconversation.com.au

Many investors steer clear of vacant land because they mistakenly believe they can’t claim interest repayments on it.

In fact, the biggest thing that most accountants get wrong when advising clients on vacant land is that the interest component on it isn’t tax deductible.

I’ve had many arguments with many accountants about this topic over the years!

The key component is the clear intent to build a property within a reasonable timeframe. If the investor was audited, the investor would need to prove that the timeframe – whether it’s a few weeks or months – was necessary to enable to construct the investment property.

I’ve heard this ‘non-advice’ so many times over the years and that’s why it’s so important that you get advice from a property accountant with a strong understanding of the relevant legislation.

Which land is best?
With vacant land, there are a number of different strategies that you could implement.

The first one is residential land that is being carved up by a developer, but you buy before the titles for each individual block have been registered. Effectively, you’re buying land off the plan, but it’s important to understand that there are pros and cons to this strategy.

The pro is that if it’s in a high-demand area and you’ve bought during the early stages of development, you tend to make some money. You also generally only need to put down a few hundred or thousand dollars as the deposit. Naturally, because you are very much dependent on how fast the developer can register each block, you’re at the whim of the market, which can be a con. For example, in my portfolio, I once bought 18 blocks of land that were not yet registered.

In fact, registration wasn’t supposed to happen for another two years. However, it happened in just eight months and I wasn’t ready. So all of a sudden I had 18 parcels of land that I had to settle on, but I didn’t have my finance organised.

After discussing it with the developer, I ended up settling on four of them and he released the other 14 back to the market, which worked out well for him because the market had improved.

So, if the land is registered well ahead of time, you can be left scrambling.

On the other hand, if registration takes longer than expected, the market could have slowed down. Like any off-the-plan project, you only need one bad valuation to negatively impact
the entire subdivision or development. Plus, everyone will be building at the same time, which means you’re competing for trades and will likely be finished at the same time, too, and that means a strong likelihood of softer prices.

What about greenfield and infill sites?

When I say greenfield sites, I mean blocks of rural land that you intend to rezone for residential usage. Now this is a strategy for more advanced investors because there is more risk as well as a higher financial component required for earthworks and approval costs. Greenfield sites can be bought for an affordable price, but if you can’t get the subdivision approved you need to have the money behind you to fight all your way up to the Environment Court if necessary.

A better strategy is to target infill sites within already established residential areas.

In this scenario, you buy a larger block of land, usually with a house on it, to carve off the land at the back or the side to sell as vacant or with a new property on it.

The other option is to subdivide, then construct a new dwelling and then keep both. Infill developments can also lean towards knocking the old house down, splitting the block into two and selling the vacant land, or building two houses or even multiples. It must always come back to whether there is a market for your project and whether the numbers add up, because you must take into account all of the costs on the way in and on the way out.

That way you can make an educated decision whether to keep holding long term or take your profits to invest elsewhere.

Whichever strategy you choose, you must do your figures on the worst-case scenario to see if it adds up. That’s because land generally has a lower, or no yield to start off with, which means your holding costs can be higher than with a house, for example.

At the end of the day, vacant land as a strategy, does work. You just need to have your eyes wide open to ensure your figures are correct and you must understand that it might be a while before income rolls in.

Finally, it goes without saying that you must get tax advice from a specialist accountant who understands  property. If you don’t, you could end up with pockets just as vacant as the land you’re investing in.