Land Banking: A Long-Term Investment Strategy
- Craig Kaiser
- 17 hours ago
- 7 min read
Investing often brings to mind stocks, bonds, or real estate properties with buildings already on them. But what about the land itself? An often-overlooked yet powerful strategy is land banking. This approach involves acquiring undeveloped land with the expectation that its value will increase over time. It’s a game of patience and vision, where investors purchase land in areas poised for future growth and hold it until development becomes profitable.
What is Land Banking?
Land banking is the practice of purchasing raw or undeveloped land, holding it for an extended period, and eventually selling for a profit. Unlike house flipping or commercial real estate investment, land banking is fundamentally a passive, long-term strategy that requires minimal active management. Land banking relies on the principle of appreciation. Investors identify and purchase land in the "path of progress"- areas that are likely to see significant population growth, infrastructure development, and increased demand in the future.
Overall, the concept of land banking is simple: identify areas where future development is likely, acquire land before prices appreciate significantly, and hold until the surrounding area matures enough to make your parcel valuable to developers, businesses, or other end users.
Land Banking and Housing
In housing and building development, land banking is a financial arrangement where investors purchase land for home builders or developers, earning a fee to hold the property until it’s ready for use. This partnership between builders and investors plays a key role in how land is acquired, developed, and delivered. As more home builders adopt a land-light operating model, land banking is poised to play an increasingly significant role in the industry.
Land Banking for Community Development & Governments
Governments and communities nationwide are increasingly turning to land banks to address vacant properties and revitalize neighborhoods. In this context, a land bank's primary purpose is to acquire blighted properties, such as brownfield sites, and temporarily manage them. They hold these properties until they can be transferred to new owners or developed to achieve community goals like affordable housing. Land banks can be nonprofit entities, like in Colorado, although they can be public entities in other states. As of 2024, there are over 300 land banks and land banking programs across the United States, operating at municipal, city, county, regional, and state levels.
Here are some examples of land banking:
Affordable Housing: The City of Fort Collins, Colorado, purchases underutilized land to build affordable housing units.
Rehabilitation and Redevelopment: The Cook County Land Bank Authority renovates underused or tax-delinquent properties.
Brownfield Remediation: The West Virginia Land Stewardship Corporation transformed a former coal plant site into a storage facility after cleanup.
Another way that governments can revitalize underused land and brownfield sites is through renewable energy leases. For example, closed landfills owned by municipal governments can be leased for solar farms- an initiative that generates revenue through annual lease payments and breathes new life into an unused asset. LandApp helps government agencies across the nation connect with developers to lease agency-owned land, all at no cost to them. If you're interested in learning how your organization can benefit from LandApp's tools, learn more and book a call with our government team below:
Is Land Banking Worth It?
For individual investors, land banking can be worth it if you do it right. Picking the right location, conducting comprehensive due diligence, and timing your purchase are critical for success. Overall, land banking offers several unique advantages that set it apart from other forms of real estate investment. The main benefits of land banking are its potential for significant returns, low maintenance and holding costs, and its flexibility in use. Understanding these benefits can help you decide if it aligns with your financial goals.
1) High Potential for Appreciation
The core appeal of land banking is its potential for significant returns. Land is a finite resource. As populations grow and urban areas expand, the supply of available land diminishes while demand increases- a recipe for long-term appreciation. By purchasing land in a strategic location before it becomes highly sought-after, you position yourself to capitalize on this inevitable demand. The value of a well-chosen parcel can increase exponentially over a decade or more.
2) Lower Maintenance and Holding Costs
Compared to owning a building, raw land is incredibly low-maintenance. You don't have to worry about tenants, plumbing issues, roof repairs, or other costly upkeep associated with developed properties. The primary holding costs are typically property taxes, which are often much lower for undeveloped land than for a commercial or residential building of the same value. Insurance costs for raw land are negligible or unnecessary as well. This "hands-off" nature makes it a simpler, less stressful investment.
3) Diversification and Hedge Against Inflation
Land banking allows investors to diversify their portfolios beyond traditional assets like stocks, bonds, and developed real estate. This diversification can reduce risk and provide a buffer against market volatility. Additionally, land has historically served as an effective hedge against inflation. As the purchasing power of currency declines, tangible assets like land tend to maintain or increase their real value. During inflationary periods, construction costs rise, making existing land more valuable relative to the cost of developing new infrastructure.
4) Flexibility & Multiple Exit Strategies
Flexibility is another major advantage of land banking because it offers flexibility in terms of future use. It can be developed for commercial, residential, or industrial use, depending on market demand and zoning regulations. This flexibility increases its value and makes it appealing to potential investors. When you're ready to sell, you aren't limited to a single type of buyer.
Depending on the location and zoning, you could:
Sell the entire parcel to a large-scale residential developer.
Divide the land into smaller lots and sell them individually (a process known as subdivision).
Lease the land for renewable energy, agriculture, or recreation to retain ownership while you wait for its value to mature.
Sell to a commercial builder for a shopping center or office park.
This variety of options gives you the power to adapt to market conditions and maximize your return on investment.
Potential Risks of Land Banking and How to Mitigate Them
No investment is without risk, and land banking is no exception. Being aware of the potential challenges is crucial for making informed decisions.
1) Market Stagnation or Decline
The biggest risk is that the anticipated growth never happens. You might buy land expecting a city to expand in its direction, but development patterns shift, and your property remains isolated and low in value.
Mitigation: Thorough due diligence is your best defense. Research local government development plans, population growth projections, and economic trends. Don't just follow rumors; look for concrete evidence of future growth, such as planned highways, new major employers, or approved zoning changes.
2) Lack of Cash Flow
Raw land does not generate income. In fact, it's a negative cash flow asset because you must pay property taxes and potentially insurance without receiving any rent. This makes it unsuitable for investors who need regular income from their assets.
Mitigation: Ensure you have the financial stability to cover holding costs for many years without needing the investment to produce cash. Land banking should be part of a balanced portfolio, not your sole investment strategy. Alternatively, you can lease the land for renewable energy, recreational activities, or agriculture to generate income while you hold the land and prepare to sell it later.
3) Zoning and Regulatory Hurdles
Zoning laws dictate how land can be used. A property zoned for agriculture cannot be used for a shopping mall without a lengthy and often expensive rezoning process. Regulations can change, potentially limiting your property's development potential.
Mitigation: Before purchasing, investigate the current zoning and any proposed changes. Understand the local political climate and the likelihood of securing necessary permits or zoning variances in the future. Consulting with a local land-use attorney can be a wise investment.
4) Environmental Issues
Undiscovered environmental contamination, such as groundwater or soil contamination from previous industrial use, can lead to costly cleanup liabilities. Similarly, the presence of protected species or designated wetlands on a property can place significant restrictions on what can be built, if anything at all. These environmental factors can severely impact not only the property's market value but also its future development potential, sometimes rendering a promising parcel of land unusable. Conducting thorough environmental due diligence before a purchase is absolutely essential to avoid unforeseen complications and financial losses.
How to Get Started with Land Banking
If you’re ready to explore land banking, define your investment goals first: are you looking for a 5-year or a 20-year hold, and what is your target return on investment? Answering these questions will help narrow your search and identify properties that align with your financial timeline and risk tolerance. Next, research emerging markets by focusing on areas with strong growth indicators, such as cities with job growth, population increases, and significant infrastructure projects in the pipeline.
Once you identify a potential property, dig deep- comprehensive due diligence is critical for a successful investment. Before committing to a land banking investment, check on these factors:
Title Search: Ensure clear ownership and identify any easements, liens, or encumbrances
Survey: Verify exact boundaries, acreage, and topography
Zoning Verification: Confirm current zoning and understand the process for changes
Access Rights: Ensure legal access to the property via public roads or recorded easements
Utility Availability: Document existing utility access or proximity to services
Market Analysis: Research comparable sales and development trends in the area
Environmental Assessment: Phase I environmental site assessments and LandApp's Risk Index Scores in its free Property Reports can identify potential contamination issues
Remember that financing land purchases can be more challenging than financing a home, as traditional lenders often view it as a riskier investment. This means they may require a larger down payment, typically ranging from 20-50%. An alternative option is seller financing, where the owner agrees to receive payments over time, offering a more flexible solution. Additionally, patience is key when it comes to land banking. It’s a marathon, not a sprint, and the most successful land investors are those who hold their assets through market cycles and wait for the right time to sell. Avoid the temptation to sell too early and trust the long-term vision and long-term holding strategy you established from the start.
Is Land Banking Right for You?
Land banking can be a highly effective long-term investment strategy for patient investors with the capital to hold an asset that doesn't produce immediate cash flow. By purchasing undeveloped land in the path of growth, you can position yourself to achieve substantial returns as demand and value increase over time. If you're looking to buy land and sell it for a profit quickly, a quick-flip land flipping strategy might be a better option for you, but this also comes with risks.
While the risks are real, they can be managed with meticulous research and a clear strategy. By understanding the market, performing due diligence, and having a long-term perspective, you can turn a simple plot of earth into a powerful engine for wealth creation.
Ready to find your next land investment? Explore listings and market insights on LandApp to begin your search for the perfect long-term opportunity.
