Investing in land can be worthwhile in the longer-term, but a big drawback is that it rarely provides any sort of income while you hold it.
And so you cannot claim the deductions you could with a rental property, such as interest on borrowings, depreciation and maintenance. The investment potential of land is often ignored – as pointed out by Money reader Tom – for these reasons.
“Land appreciates, buildings depreciate” is an old saying in real estate, meaning that while land goes up in value over time, the buildings on it lose value.
So is land a better investment than a house or unit? This really depends on what you want to achieve from your investment.
Undoubtedly you can make money by investing in land that can be used for housing or some other commercial pursuit. In Australia median land prices jumped 14% in the year to December 2009.
This compares well with a median house price rise of 12.1% in 2009, according to data from Australian Property Monitors.
But of course, while at best medians are only a rough guide, those who invested in houses would generally have also reaped rental income. Many would also be negatively geared, generating tax breaks on tax paid on their regular incomes. Still, 14% compares well with what you can earn from any bank account or term deposit.
But keep in mind 2009 was a very good year. The last time land prices grew by that much was in 2004.
It is possible to make windfall gains by buying broadacre or rural land that is later rezoned to allow building.
The profits can be large, but of course so are the risks. One scam that never really got a foothold in Australia involved Land International, a company selling land in the UK that, it said, was about to obtain planning permission for houses. The lure was get in early and make a motza.
But the land was in “green belts” where no development was ever likely to be permitted. The company was shut down by the British government in 2008.
The lesson to be learned is to conduct your own checks with the relevant authorities if you are tempted to buy land because you think (or are told by the marketer) its use will be changed, making it more valuable. Some people invest in land intending to build a future home, wrongly believing the price will only ever go up.
If you do this, make sure you buy suitably zoned land with road access and services.
Borrowing to buy land is not as easy as borrowing for either a family home or a rental property. Many banks will only lend to those who intend to build within a certain period. For example ANZ stipulates within three years.
The other thing to know is that in certain circumstances you may be up for some capital gains tax on your land if you do not choose it as your main residence from the time you buy it.
If you already own or are buying a home, you will need to decide on which you will claim the main residence exemption when you sell one of them.
You are allowed to claim your vacant land as your main residence for up to four years immediately before you complete a home on it, but if you do that you cannot claim the exemption on your previous home for the same period.
You can only claim the main residence exemption on both for a period of six months when you are changing homes.
For more information see the Australian Tax Office website.