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Buying a Block of Land for Investment

If you’re thinking of investing in land, there are pros and cons to consider before you take the plunge.

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, updated on August 8th, 2023       

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Are you wondering what the pros and cons are of buying a block of land for investment purposes?  Consider the advantages and disadvantages of investing in land with Savvy and compare them to buying an income-producing investment property.  We can help you save money when choosing your investment loan by presenting you with a range of products so you can find the best deal available to you in Australia more easily.

Pros of buying a block of land for investment purposes

There are many advantages to investing in land, or buying land for investment purposes (or to build on later) as compared to buying an investment property.  These include:

  • lower purchase price compared to an investment property, so potentially less deposit and home loan required
  • much lower stamp duty costs
  • less competition to buy undeveloped land, so the potential exists to grab a bargain
  • it's cheaper to buy land and build, rather than buy an existing home
  • buying land first before building allows you to spread the cost over several years if needed
  • no need to find tenants or pay a property manager if you keep the land vacant
  • no repair bills or appliances to malfunction on vacant land
  • lower maintenance costs for an empty block compared to developed land
  • lower insurance costs for vacant land
  • potential for rapid value increase if re-zoning takes place when you invest in land

Cons of buying a block of land for investment purposes

However, there are also some barriers to overcome if you do decide you want to invest in land.  These are:

  • banks may view your purchase as a ‘speculative investment’ if you don’t intend to build on your land, so it may be harder to get approval for an investment home loan
  • in most circumstances, you won’t receive an income from undeveloped land (unless it is situated in a farming environment and is used to agist livestock or grow crops)
  • undeveloped land may not appreciate in value as quickly as an investment property
  • you'll still have to pay the insurance cost of protecting yourself against public liability (in case anyone injures themselves whilst on your land)
  • there could be ongoing maintenance costs, as local councils have various regulations about slashing and mowing undeveloped land
  • you may also have costs associated with keeping your land pest and weed-free
  • you may have to erect and maintain fencing to prevent people from entering your land (depending on your local council regulations)
  • if you choose to sell your land, there may be fewer buyers interested in purchasing it
  • you may have to pay capital gains tax if you sell your land for a profit
  • there were law changes that came into effect on 28th October 2019 that limited the tax deductions that can be claimed for holding vacant land, making it less attractive to investors to invest in land without developing it

What is negative gearing and how can it benefit me?

Negative gearing is a term used to describe borrowing money to invest, where the cost of borrowing is greater than the income received from that investment.  If your investment makes a loss, this loss can be claimed as a tax deduction against other sources of income, resulting in less income tax being paid.

In the case of a vacant block of land, you won’t receive an income from your investment (assuming there’s no income from farming livestock or growing crops) so the entire cost of buying that land can be claimed as a tax deduction.  These costs may include:

  • mortgage repayments (depending on how much the land costs and how much you borrowed to buy it)
  • insurance – approximately $200 a year for public liability insurance for a block less than 2,500 sq m
  • slashing/mowing – budget for around $300 a quarter for an average residential block
  • pest and weed eradication – allow up to $200 a year for regular weed spraying and pest baits or sprays (if required)
  • fencing – which may be a one-off initial cost, depending on council regulations, and if your land was fenced when you purchased it

If you subsequently decide to build on your land, you can still negatively gear it if the rental you receive doesn’t cover the investment loan interest costs you’re paying.  If you then decide to move into the home you build, it becomes your primary place of residence and can no longer be used for negative gearing purposes.

What features should I look for in an investment loan?

Investment loans may be fixed rate, variable rate or split loans, and can be principal and interest or interest only.  You should seek financial advice before deciding how to structure your investment loan to maximise your negative gearing benefits.

Your accountant or financial advisor will advise you as to whether you should be seeking to minimise the interest you pay on your loan.  If you’re in a high-income tax bracket and have few other tax deductions you can claim, saving on interest may not be your financial priority.  You may be more interested in negative gearing potential.  If this is the case, your decision to buy a block of land should concentrate on buying to maximise your capital growth. 

However, if you aim to eventually build on your land, you may be looking at building up the equity in your investment so it can be used as a deposit for a loan to cover construction costs.  If this is the case, loan features which can minimise your interest bill (such as an offset account or the ability to make additional repayments) should be your focus.  Savvy’s home loan extra repayments calculator will help you see how quickly you can build up equity in your investment property by making additional repayments.

Bringing you more frequently asked questions about buying land for investment

Will I have to pay land tax on my vacant land?

Yes – in most states and territories of Australia (except the NT), there are land taxes.  If you own land which is not your primary place of residence, you’ll most likely be liable to pay land tax.  The cost of this tax varies from state to state, so consult your state government website to find out current land tax costs in your area.

Is it better to wait to develop vacant land rather than build on it straight away? 

No.  It used to be a common strategy to buy a parcel of land and hold it for several years before building on it, but changes to taxation laws which came into effect in 2019 made it less attractive to do so.  The reasons investors now hold onto vacant land include: 

  • to spread the cost of land purchase and home construction over several years
  • to buy land with an inheritance or a lump-sum windfall and save up the deposit to build a home on it
  • inter-generational investment – parents buying a block of land for their children to build a house on when they come of age or can afford construction costs
If I sell my land before I build on it, will I have to pay capital gains tax?

Yes – the sale for profit of any investment is regarded as a capital gain event, so you will be liable to pay capital gains tax on the profits realised through the sale of your investment land.

If I am not an Australian citizen and I want to buy a block of land for investment purposes, are there additional costs involved?

Yes – in some states of Australia, if you’re regarded as a foreign person or represent a foreign trust, you’ll be required to pay a Foreign Ownership Surcharge.  For example, in SA this surcharge is 7% of the value of the residential land and in NSW it’s 2% of its value.

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