Home Loan Experts

The benefits of investing in land can be substantial but only if you play your cards right.

Land (raw land) refers to undeveloped land usually without a property built on it.

If you’re not building, banks see it as a “speculative investment” and may not approve your home loan. Discover how to qualify.

What are the benefits of investing in land?

Compared to other investments, land doesn’t need much of your involvement. It can be a passive long-term investment for you.

What’s more, you may be able to buy smaller pieces of land with cash alone. Property taxes, insurance or maintenance costs aren’t too high. You can take advantage of negative gearing benefits as well.

Competition is pretty low so you can get a good deal more easily. People with a limited budget can buy now and build later. This ensures that they won’t be priced out of the property market later on.

Although its value may increase quite slowly, land prices can hike overnight. Some people buy land thinking the government will rezone it soon. Once rezoned, the land value increases and they can sell it to a developer.

You can also choose what you want to do with the land. Depending on the situation, you can sell it to a developer or build yourself.

However, investing in raw land can be complicated. Invest only if you know what you’re doing.

Do I qualify for an investment loan?

Investment loans tend to be of higher risk. This is why it’s usually tough to qualify for one. You must be in a strong financial position. You’ll also have to meet basic lending criteria such as:

  • Deposit requirements: Many banks have reduced their maximum Loan to Value Ratio (LVR) on investment loans down to 80%. This means most banks will need you to have a 20% deposit. If you don’t have a sufficient deposit, you’ll need to have a guarantor instead.
  • Genuine savings: Genuine savings are basically savings you’ve held or collected in a bank account for three months at least. You’ll need to have at least 5% in genuine savings. However, some may require you to have as much as 10% in genuine savings.
  • Equity: You may need to have equity in another property if you’re borrowing more than 90% LVR.
  • Good credit history: Banks prefer borrowers with little to no bad credit records. This also means your credit score needs to be above average.
  • Stable employment: Banks will want to see that you can afford the investment loan. This means you’ll need to have a strong income with stable employment. If you’re self employed or a professional investor, you’ll simply need to show a strong stable income. The level of income required depends on the loan amount as well as the bank you apply with.

How much can I borrow?

The amount you can borrow depends on a number of things. If you’re only buying and not developing vacant land, you may be able to borrow up to:

  • 60% LVR for commercial farms. All loans will be assessed case by case using rural farm guidelines.
  • 70% LVR for land blocks over 60 hectares or 148.3 acres. All loans will be assessed case by case.
  • 80% LVR for land blocks up to 60 hectares or 148.3 acres. Most lenders may not approve your application though.
  • 95% LVR for land blocks up to 11 hectares or 27.2 acres. However, some lenders may not let you borrow more than 80%.

If you’re planning on building, you can take out a cost plus construction loan. You can then borrow up to 80% of the land value and cost of construction.

We have access to loan products from major banks, specialist lenders as well as private lenders. Our specialist mortgage brokers can also help you get approved.

You can call us on 1300 889 743 to speak with one of our credit specialists. You can also fill in our free online application form and one of us will contact you instead.

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What to watch out for before investing in raw land

There are many things to watch out for before investing in land. You’ll also have to consider how the bank will assess your loan application.

Here are a few things you can consider before investing in land:

  • Location and zoning: Land inside or around major cities and regional centres are relatively easy to finance. Their value appreciates faster as well. If the land is on a bank’s list of postcode restrictions, you may not qualify for a mortgage. Zoning is important because of the usage restrictions that are applicable in some zones. For example, you can’t build a shopping mall in a residential zone.
  • Size and shape: Large pieces of land take longer to sell. This is why banks don’t prefer them. Even if you’re buying with cash, you’ll still need to consider the size and shape of the land. The land could be slightly tilted or have a cliff or ravine. This can make it quite difficult to develop. This type of land may also take a long time to appreciate in value.
  • Infrastructure: This mainly includes road access and availability of public utilities such as water and electricity. Banks require the land to have direct access using an all weather road. If you want to build, the land must have water and sewerage services or septic tanks.
  • Your financial position: Raw land isn’t usually a good choice if you’re looking to re-sell for a quick profit. You’ll have to pay additional costs if you’re planning on developing. This can include surveyor fees, installation charges, legal costs, and more. You’ll also need to be prepared to pay taxes and mortgage repayments without any cash flow in return. For more information on land taxes, you can check out the Australian Taxation Office (ATO) website.
  • Property history: A cheap piece of land close to a regional centre may seem like a good deal. However, find out why it’s selling at a lower price. For example, it may have been a landfill in the past but cleared up recently. It can still have some environmental contaminations. This is specifically in the case for commercially zoned areas.

It’s best to speak with a financial advisor before you make any decisions.

Investing in land FAQs

What are the common ways of investing in raw land?

There are four major methods of investing in land:

  • Holding land: You can invest in land by simply holding on to it. Once the land goes up in value, you can sell it to a developer. Please note that timing is very important though. This is especially because the value of land generally appreciates very slowly.
  • Handing it over to a developer: You can buy land and then hand it over to a developer. By legally changing the zoning of the land, it can be worth a lot more to a developer. For example, you buy a piece of land in a commercial sector that’s zoned for residential use. You can then legally change the zone to commercial by going through an entitlement process. You can then sell it to a developer.
  • Renting it out: A vacant piece of land can be rented out to a business or household. For example, you can turn a piece of land into a parking lot and rent it to nearby businesses. Farmlands can be leased to farmers or commercial businesses.
  • Building: You can develop the land yourself and sell it on a later date.

Who can benefit the most from investing in land?

Home building companies can benefit immensely from investing in land. Long-term corporate land investors with diverse portfolios of land can benefit a lot as well. Their development and entitlement skills and experience can reduce the overall risk significantly.

However, investing in land is usually high risk for small investors. This is mainly because of the low chances of earning a fair rate of return and possibly no cash flow. Stocks, bonds, mutual funds or properties can be a better investment for them.

For example, smaller investors can buy a $450,000 investment property instead of a block of land. They can also turn their home into an investment. This way, they can earn a more stable rental income and benefit from capital growth.

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