Land banking involves purchasing parcels of land to sell or develop in the future. Many people who buy land have no plans for its development, but they might hold onto it in case future sales or subdivision opportunities arise. While there’s undoubtedly value in investing in land due to its future profit potential, there can sometimes be just as many disadvantages, such as those below. 

Ongoing Costs

You might decide to sell your land fast in Texas when you realize you’ll need to pay property taxes on land you’re not using or making money on. How much you typically pay each year can depend on where the land is, its potential for development, and whether it has access to public services, such as gas, water, and sewer. 

In 2019, the mean effective property tax rate was 1.03% of the property value, but New Jersey had the highest rate at 2.13%. If you paid 1.03% on a $200,000 parcel of land, you could expect to pay more than $2,000 each year. 

Permits Can Be Complicated

If you’ve purchased land with the sole intention of developing it, you might find the entire process challenging. Most land falls under five categories: agricultural, transportation, industrial, residential, and recreational. If you’re unsure how your property is zoned, you might obtain the wrong permits and have to endure the entire complicated and stressful process again. However, if you were to sell your land, you could put your money into something that has already been developed and avoid the permitting process altogether. 

The Market Is Volatile

Many people purchasing well-established homes aren’t overly concerned about slight market fluctuations. They’re in their properties for the long haul, and an increase or decrease doesn’t usually affect them. 

However, if you’ve purchased land with the sole intention of selling it at a later date, market volatility can be a cause for concern. If you bought land when it was at its most expensive, you run the risk of prices dropping, meaning you might have to sit on it for far longer than anticipated to make back what you lost. 

No Ongoing Returns

Many property investors purchase well-established homes, rent them out, and enjoy ongoing returns for several years. They might then profit further by selling the home for significant gains in the future. However, land banking doesn’t generally offer the same returns.

Since it’s sitting vacant, you pay property taxes and don’t receive a return on your investment until the time comes to sell it. In the meantime, you might also need to ensure any grass is kept short and take care of rubbish removal if local residents start using it as a dumping ground. While you might make a significant profit when you decide to sell it in the future, there are no guarantees that it’s any more than you might get if you sell it now due to market volatility. 

Land banking has been a lucrative investment option for many people, and it continues to be popular for anyone with money to spare. However, it’s worth keeping in mind that it can also be an expensive route to travel down, especially concerning taxes, market volatility, and complicated permitting processes for future development.

‍