Land hoarding makes more money than building houses.

How does hoarding land make more money than putting the money into a bank.

For this piece, we will say the investor has wealth of €50 million in cash, in a bank.

Actually, the money is in ten Irish banks. So ten banks with five million on deposit.

Its five million in each bank because, if one bank goes bust, then the investor loses just five million euro.

Banks do not offer a lot of interest. On average you get one percent interest, less charges and taxes etc.

So a fifty million stash, would earn the investor interest of about fifty thousand euro per year. That’s not a lot of money to someone who has fifty million in cash.

Rich people are looking for investment opportunities outside of the banking system, because the return from banking is not very good, and, its high risk, as banks can easily go bust and the investor, loses their money.

Rich people look for Art like, the Mona Lisa, to buy. If they could buy the Mona Lisa, they would pay for a secure place to store it, they would insure it, and they would enjoy the prestige of owning such a desirable artwork. Doubt if the French Government would ever sell the Mona Lisa though, so you need to remember this is just an example.

Really expensive works of art are rare and most are in private collections or owned by governments. This means they rarely come up for sale.

This causes a problem for rich people. What else can they buy to keep their money safe. Cars, yachts, islands even, but, most of these, have already been bought by other rich people.

Rich people look for other ways to invest their money. Building homes and offices has always been good for rich people.

A developer spots a bit of land somewhere, and thinks, I can build houses on that and people will buy them for exorbitant prices. Developers rarely put their own money into these projects. They will find an investor and convince them to back the project. At today’s rates, the return on investment would be about ten percent.

Our investor will make about five million euro on this project. The project will take five years to complete. So, our investor, stores their money in the project for five years safely, and makes about one million euro per year. Good money.

Normally the investor will buy the land in their own name or in the name of a company that they own and control. Let’s say the land purchase price for this project is ten million. The investor now owns the land and the process of drawing up a planning application begins. This can take a long time. In this case the planning process is going to take two years minimum.

While the planning process is being pursued, the investor discovers that the value of the land has increased to fifteen million euro. This means the investor has now made two and a half million euro, per year, by doing nothing with the land.

The money is very safe. It can’t be stolen, no need for any money to be spent securing the site, just let the wildlife run free and the money is safe. If the investor holds the land for another three years and the land values increase at the same rate, then the investor makes another seven and half million euro, basically for doing nothing. There is no more risk to their money, because they have still only committed the original ten million and their other forty million is still safe in the banks.

If the investor continued with the project, they would have to commit all their money, to finance builders on site working, and anything can happen during this process. Any glitches and the investors’ money is at risk, unnecessarily.

At this stage, the investor has already made more money than was originally intended, and, if they hold on to the land for a total of ten years, they can make more money than was ever envisaged from the project.

They have only put a fifth of the money at any risk, however that risk is offset by the fact that, no matter what happens, the money is safer and earning more than it would in a bank.

This investor has found a way to make money hoarding land (even if they became a land hoarder by accident). The money is safe for a very long time and can be left lying in the ground until the investor needs cash. We already know this investor has still got forty million in cash in banks and therefore they are not going to need cash to pay the Tesco weekly shopping bill. They will look for more land to buy, and hope they can make the same arrangements they made with the first land bank.

Building houses on this land will only bring the original investor a return of five percent and will require huge effort and commitment. By doing nothing, the investor can, in fact, make more money, than they can make, building, so, it is inevitable this investor, will in fact not do any building in the near future.

The money is safe and increasing at a higher rate than a bank would give. The police will mind the land free of charge. They do not need to worry about the investment being stolen.

To conclude, you now know why, it is financially unattractive for any rich people to build houses.

Have a nice day.

John