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victor kumar vacant land investing in property

Should you invest in vacant land?

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1 minute read

Should you invest in vacant land?

April 27, 2018

Many investors steer clear of vacant land because they mistakenly believe that 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 (Steele Decision, Tax Ruling 2000/17).

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 time frame.

If the investor was audited, the investor would need to prove that the time frame — whether its a few weeks or months — was necessary to enable to construct the investment property.

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Ive heard this “non-advice” so many times over the years and thats why its 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, youre buying land off the plan, but its important to understand that there are pros and cons to this strategy.

The pro is that if its in a high-demand area and youve 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 a deposit.

Naturally, because you are very much dependent on how fast the developer can register each block, youre 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 wasnt supposed to happen for another two years.

However, it happened in just eight months and I wasnt ready.

So, all of a sudden, I had 18 parcels of land that I had to settle on, but I didnt 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 youre 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 cant 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.

Thats 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 dont, you could end up with pockets just as vacant as the land youre investing in.

About the author

Victor Kumar

Victor Kumar

Victor Kumar is the author of 'Supercharge your Property Portfolio' and the founding director of Right Property Group.

Victor and his wife came to Australia from Fiji in 1997 with just $4,500 in their pockets. They worked hard as radiographers but realised this was not the way to prosperity. Victor embarked on a process of building wealth through property. He has amassed a substantial property portfolio, and is still actively buying and renovating property. His recommendations are based on what works in today’s market, not what used to be effective a year or more ago.

Victor’s experience, finance background, and financial planning qualifications mean he is well equipped to negotiate with banks – helping them find ways to say “Yes”. He has also invested significant time and money in learning from other property investment experts and knows how to make a portfolio work.

Of course, Victor has made a few mistakes along the way but these have made him wiser – and he’ll let you learn from his mistakes so you don’t need to make them. His goal is to help you achieve your financial goals by sharing his extensive knowledge about financial structures and investment property.

Victor is now sought after as a keynote speaker at several property investment seminars and is acknowledged by his peers as an expert in the industry.

http://www.rightpropertygroup.com.au/

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