The need to buy land is rising because of the high return on investment. It’s possible to achieve high profits if you build commercial properties, rentals, or holiday homes. However, it’s only feasible if you have the cash to invest. If your savings don’t suffice, you may need to look out for financial assistance.
Accessing land loans is sometimes challenging because there’s no building on the land to be considered collateral. It’s unlike home mortgages, wherein you can take out a loan with your current home as collateral. So, knowing typical financing options for land purchases is critical.
But these dynamics shouldn’t deter you from buying land. Remember, the land will always appreciate because of the ever-growing population. A study estimates the UK population will grow 17% in the coming years, so more people will need a place to rent or build a home. With that in mind, below are six ways to finance your next land purchase for investment:
- Local Bank Loans
Banks are a feasible financing option. If you work with local banks, you may get a fair deal due to the trust you’ve built with them. You can have multiple offers based on the duration you need to repay the money. They’ll first have to check your credit score to assess your possibility of paying the loan. You could also get bank loans if you plan to buy, build and rent out immediately. You won’t find it challenging to get tenants if the plot is at a prime location.
The setback is not all banks will provide you with a loan. Some avoid land loans because of typical issues that may arise and compromise your ability to repay the debt. They may also charge you higher interest when the repayment period is longer. You may also spend a lot of time on the closing process, which can be expensive and protracted.
- Owner Financing
Also known as seller financing, this is a loan given by the landowners. They’re the ones who handle the mortgage process instead of a financial institution. It’s an excellent flexible option if you’ve tried other means, such as asking for loans from banks, with failed attempts. As it’s a contract between you and the owner, you could bargain for every cost associated with the purchase. Also, with owner financing, your credit score doesn’t impact your ability to borrow money.
However, when signing any agreement papers with the owner, have the papers reviewed by a solicitor to avoid shocking clauses in the package. The drawback with such options is the risk of paying back colossal interest. Moreover, the landowner may refuse to honor the contract after completing the payment.
Also, if, by bad luck, something catastrophic happens to the seller, the person taking over may not value the agreement.
- Construction Loans
It’s a type of financing wherein the money you borrow funds the buying and the building process. The lenders, in this case, will be in charge of the building to completion. It’s a short-term loan you can take to finance the building on the land for a year. After that, you can choose to convert to long-term payment duration, which spans a 15- or 30-year period, or repay the loan using the new investment building as surety.
The first thing you must do is make a down payment. You’ll also need to show your building designs so that the lenders can assess how much money will go into funding your project. The contractors you’re working with must also build according to the plan to get paid.
- Private Lenders
You may have friends or family members with enough cash, and you could borrow money from them to finance your land purchase. The benefits of such a financing option are that you may have a lower interest and can negotiate fairly. The only drawback you’ll face is finding someone willing to finance a significant purchase. You may also feel obligated to resell the land if the person you borrow the money from falls into some financial bind.
- Cash Payments
If you have enough funds to purchase land, you could save yourself from the need to borrow money to finance the land purchase. You won’t have to deal with bank fees such as closing and application fees, and you won’t owe anyone money. However, cash payments aren’t without their disadvantages, such as losing your liquid assets.
- Commercial Lenders
These lenders can give you funds to purchase your land if you show them that you’ll use the property for commercial purposes. They can allow you to make personal guarantees using your current home or other investments you may have. However, you must convince the loan officer you can repay the money.
All the land financing options have their benefits and setbacks. Therefore, take your time and assess each before settling on the most viable option. Eventually, you’ll buy your next land for investment smoothly without hiccups.