You can do better than a savings account when it comes to growing your money in the medium or long term. Today I’m going to talk about land banking: it’s advantages and disadvantages.
You’ve worked long and hard all week and your paycheck has finally arrived. Where does it go? Housing, transportation, utilities, and food are the big spending categories for most people. You’re hopefully also putting money aside every month for saving and investing. If you’re a saver, this article is for you.
Once you have an emergency savings account in place with 3-6 months of basic living expenses socked away, it’s time to start thinking about better ways to put your hard earned dollars to use. Enter land banking.
The sad state of affairs for savers
As I write this, the annual interest rate on the best available savings account hovers around 1.75%. The current consumer price index, the benchmark for inflation, is around 1.5%. Put simply, your hard earned savings are going nowhere fast.
Most people are therefore investing in in the stock market, which offers higher returns. Of course, the stock market comes with higher risks and not everyone wants to put their hard earned dollars into the Wall Street roller coaster.
This conundrum facing savers has led to a boomlet of alternative investing ideas and oddball get rich quick schemes. Bitcoin anyone?
One idea that’s been around for as long as civilization that still offers promise to hard working savers is land banking.
What land banking can do for you
Land banking is what it sounds like. You take some accumulated savings and buy (bank) parcels of vacant land over time. You’re effectively parking cash in something that, unlike a stock or 1s and 0s in an account, is a tangible asset that will always have value. Your goal is to hold the land for years to come and enjoy the likely annual appreciation that comes with the scarcity of land.
Even if you don’t have several thousand dollars lined up for land banking, you can always buy land on affordable monthly terms. Once one property is paid for, you can start the process over again. In addition, you can also buy land with a self-directed retirement account and perhaps enjoy some great tax benefits down the road.
Everyone’s strategy is different, but eventually every land banker will cash in on their properties. This can be done by holding on to a property and improving it to realize monthly cash flow. The other way is of course selling the land. If you’re thinking about your tax bill, it’s best to sell on monthly terms to your buyer. But hey, a cash sale is certainly nice too!
Land banking is an old and powerful saving and investing strategy, one that’s been used by many wealthy individuals and businesses for as long as we’ve had property ownership. This is anything but a new fad or get rich quick scheme.
Unlike putting your money in a savings account, there’s opportunity for serious wealth building. Unlike putting your money in a stock or mutual fund, land is a tangible asset who’s value will never be zero, and it’s an investment you have direct control over. Nonetheless, there are certainly disadvantages worth considering.
The risks of land banking and how to mitigate them
Like any saving and investing strategy, land banking has its risks. Fortunately, risks can usually be mitigated.
One risk is that land is not a very liquid asset. Liquidity simply means how easy it is to turn an asset into cash. Land can take time to improve and/or sell. That’s why it’s a good idea to always have an emergency savings account with 3-6 months of living expenses set up before you start getting serious about land banking or investing of any kind.
The other risk is that the strategy you had for a particular parcel doesn’t work out. For example, you had hoped a property would appreciate at a certain percentage and when you go to sell the property 10 years later, you find retail prices are lower than you thought. Or, you had planned on turning your land into popular camp site and RV destination, but a zoning decision by the county now prevents you from doing so. The best way to deal with this kind of risk ahead of time is by having more than one plan for your land. It’s common in investing to have multiple “exit strategies” for every asset. Put it another way: always have a Plan B.
Bottom Line: Land banking is a great strategy
I’m not an investment advisor, but I do think it’s common sense to have a long term investment plan that consists of more than one strategy. Put your eggs in more than one basket. By all means, put your money in savings (particularly an emergency savings account), invest what your employer is providing you in a mutual fund, but consider putting money aside for something like land. This way, you have a means of building real long-term wealth, and have a solid Plan B should the market tank when you’re trying to retire.
When you consider how easy and affordable it is to buy land, I think land banking is simply a no-brainer.