Buying vacant land - pros and cons
“Buying a vacant plot, paying it off and then saving up to build used to be a great way for buyers to get a foot on the property ladder in an affordable way,” says Bill Rawson, chairman of the Rawson Property Group. “These days, however, building costs are much higher and there is less land available in popular suburbs, which means it’s more difficult to find opportunities with the same kind of potential for success.”
“That’s not to say buying vacant land is a bad investment,” he continues. “It simply means you need to do your homework in order to be able to spot a potential asset or a potential liability.”
To help you do just that, Rawson shares a few of the pros and cons to consider before buying vacant land.
Finance
Pro: Quicker to pay off
There’s no doubt that most vacant plots cost significantly less than developed land, which means you’ll be able to pay off your mortgage faster and save significant amounts on interest. This means you can start saving up to build much sooner than if you had bought an existing home, although you will still need somewhere to live in the meantime.
Con: More difficult to secure financing
Banks are reluctant to finance vacant land, as they consider it a riskier asset. Most banks won’t even consider financing anything outside of a known suburb or less than 120m², and even if you meet those criteria, you’re unlikely to get more than a 60% bond at best. There is no rental income stream and interest on capital could be lost if there is no growth potential.
Pro: Lower transfer fees
While you may have to shell out more of the purchase price upfront, the generally lower cost of empty plots means you’ll be saving at least some of that money on transfer fees. This might not be enough to balance out the need for a 40% deposit, but it certainly does help.
Location
Con: Tricky to find land in popular suburbs
Most popular suburbs in South Africa are already pretty densely populated, and it can be difficult to find vacant land for sale in these high demand areas.
Pro: Potential to invest in soon-to-be popular areas
If you can buy land in an area that is on the cusp of becoming popular, you could see great appreciation on your investment, even if you don’t build right away. This does take some research and experience to get right, however, so consider asking a real estate agent for advice before diving in.
Inspections
Pro: No home inspection needed
Since you’re not buying an existing property, there’s no need to worry about patent or latent defects, and you won’t have to go to the expense of having a home inspection done. Make sure you do some research into the geology of the land you’re buying, however, as this can affect the cost of building later on.
Con: May require a land survey and/or rezoning
When you do decide to build, you will need to have a land survey done in order to chart any gradients or underlying obstacles that may affect construction. You’ll also need to ensure that you’re correctly zoned for your plans, and apply for rezoning if necessary. This can take some time, so be sure to budget for that in your schedule.
Maintenance
Pro: No building maintenance or repairs required
A vacant plot won’t have any of the typical painting, plumbing, or electrical issues that tend to crop up in existing houses, so you won’t need to budget for those types of general repairs.
Con: Some land maintenance still necessary
Just because your land isn’t developed doesn’t mean you can ignore it indefinitely. City councils are very strict about the upkeep of land, and require you to secure your property against intruders and maintain a clean, neat and healthy environment at all times.
Municipal rates and services
Con: Vacant land is subject to municipal rates and services
Even though you don’t live on your land, you will still be required to pay municipal rates and fees for services like garbage collection and sewerage.
Pro: Rates are lower than developed land
Undeveloped land has a lower overall value, and therefore incurs lower municipal rates than developed properties. You’re also likely to have minimal water usage, so your sewerage bill will be very low as well.
Building
Pro: Create your dream home
Building from scratch has unrivalled possibilities when it comes to creating the perfect home for your lifestyle, and there’s nothing quite as satisfying as moving into a brand new home that was designed exclusively for you. Work on the interior design of your home if you can and appreciate your own space even more.
Con: Building is expensive
These days, building is a pricey affair, and constructing a new home can be as much as 35% more expensive than buying an existing home of similar proportions. This makes it difficult to turn a profit on a new, single residential construction in the short- to medium-term.
All things said, buying vacant land might not be the easiest route to a profitable property portfolio, but there are certainly enough benefits to make it worth investigating as an option.
“If you’re thinking of buying a vacant erf, the best idea is to talk to a real estate agent who knows the area in which you’re looking, and can advise you on a plot with the best potential for future growth and demand,” says Rawson. “You may also want to consult an architect or builder to get an idea of construction costs, and then do a thorough run-through on all the numbers to make sure your investment won’t cost more than it’s worth.”