The only certain thing in life appears to be uncertainty, which is why insulating our hard earned wealth against market volatility is always an attractive prospect. Savings accounts, money market accounts and various financial instruments are the most likely candidates for most, and can be considered pretty effective in terms of what it seeks to accomplish i.e., keeping our money safe. Unfortunately, with these, you still stand the chance of ending up with less money than you started with because most interest rates fail to account for macroeconomic factors like inflation. And if anything is on the up and up in the market these days, it certainly is inflation. Among the many types of investments that are often explored as an alternative to just saving money, land banking investments pop up in the market, time and time and again. In some instances, you also hear of land banking investments going south, of allegations of fraud taken up in courts. Are land banking investments a scam, or is there some merit to it?
What are land banking investments?
Simply put, land banking is investing your money in land that will appreciate in value in the future. Land banking typically involves holding on to land without an intention to develop or otherwise adding value to it. It is a popular investment method especially during tumultuous times. Those with sufficient wealth to invest in this admittedly expensive asset shield their monies from economic volatility while at the same time standing to benefit from future value appreciation. Land value appreciation generally keeps pace with inflation rates, if it does not actually exceed it. So what are the pros to consider when deciding whether land banking investments are the right fit for you?
- Long-term value appreciation
Land is among the most limited of resources and as the human population continues to grow, all livable and arable land continues to be at a premium. Hanging on to a piece of land gives the owner the opportunity to realise profits that are only seemingly limited by how long they can manage to hold on to it. Even in the shorter term, land ownership can provide considerable return on investment depending on where the piece of land is situated. There may be certain properties or areas for example that are to be developed in a short period of time in response to government policy or market demands, which can lead to unexpectedly high returns on investment.
- Flexibility
Investing in land banking is also a flexible investment option in that there are many ways in which you may choose to ‘cash out’. The easiest option is to pick your moment and sell your investment when the market is looking to buy. This frees up your cash to potentially invest in other lucrative options. On the other hand, you can carry out some value addition by dividing your land into smaller portions to be sold as and when you wish. This can be taken a step further to develop the land in the manner of your choosing. This is equal to reinvesting in your own asset for higher returns. This developed land can then be either sold or leased, which would change the manner in which you earn and enjoy the increased returns on your investment.
- Investment diversification
Land banking can be an interesting addition to your investment portfolio. Your stake in land banking can also be diversified in other ways. This includes investments across different land markets such as suburban land and arable land. You can also invest in lands spread out across geographical areas – even in different countries. This helps you spread – and thereby reduce – the inherent risk of investment across different property types and markets.
- Positive social impact and potential tax benefits
Land banking investments can also give you the chance to give back to your community. This can be done by supporting affordable housing development through your properties or even by supporting local environmental conservation efforts. These contributions can also be rewarding in terms of potential tax reductions, in addition to deductions for property taxes and asset depreciation.
Are land banking investments safe?
However, land banking investments are not always the safest of options on the market. While land value appreciation is almost a guaranteed prospect, a lack of regulation and the immense potential in the market means that the space is often populated with malignant actors looking to make a quick buck.
How exactly does a land banking investment go south?
Land banking investments fall through when investment brokers or land developers mislead investors about the true potential of the land they are being sold. Most often, scams involve the sale of land that stand little to no chance of being approved by local government authorities for development, rendering them valueless to the market. Such pieces of land can include designated ‘green zones’, properties under conservation, and floodplains. The victim of such a scam can find themselves paying an exorbitant price for a piece of land that is lawfully forbidden from being developed upon. In such an instance, you effectively lose all the capital you invested in the property.
Other ways in which bad actors fleece their ‘clients’ of their money is by ‘selling’ them property to which they own no legal rights and through professional referrals to other investment ‘advisors’, lawyers, and accountants from whom they receive commissions. These ‘professionals’ may even have other stakes involved in the property concerned.
What to look out for in land banking investments
Investment scams, especially land banking investment scams, are typically carried out in high-pressure situations where potential ‘clients’ are manipulated into quick decisions. This is achieved by creating a false sense of urgency for investing. A sense of scarcity, a rare ‘bargain’, and the fear of missing out (FOMO) can trick potential victims into investing against their better judgement.
- Check with local government authorities
You should never invest into land without checking in with local government authorities beforehand about the viability of the land for future development. Bad actors will try to persuade their ‘clients’ that these authorities are not informed about future development plans. This in itself should raise questions about how private individuals have access to information that the government does not.
- Check for investment licences
An individual or company promoting any investment scheme should hold the necessary regulatory licensing to do so. You can also ask for disclosure statements about the key features of the investment scheme’s key features, the return and the risks, commissions and how client grievances are handled. Any opportunity to ‘invest’ that cannot provide you with the bare minimum of such paperwork is not one worth risking your hard earned money.
Land banking schemes have unfortunately got a lot of bad rep due to the number of fraudsters who have tried to make a quick buck. Better regulation is something that should be advocated for, by all who seek to profit through free and fair business. Even when such positive change is achieved, it is always in the hands of the investor to do their due diligence before committing the fundamental investment sin of putting all their eggs in one basket.
(Theruni Liyanage)