The Philippines has a total land area of roughly 30 million hectares. Nearly half of which (14.19 million hectares) is classified as Alienable and Disposable (A&D) lands, meaning it can be privately owned.
That’s a lot of land. And whether or not it will be utilized for commercial, residential, or industrial use, it’s simple fact that there’s plenty of land to own and develop around the country.
In this article, we’ll take a look at the viability of investing in land along with all relevant information related to it.
What is Land Banking?
Land banking is essentially just another way of saying, “investing in land”. Wikipedia defines it as the “practice of aggregating parcels of land for future sale or development”.
It’s the act of buying raw pieces of land and then either selling it for profit or developing it.
History of Land Banking in the Philippines
The Philippines was occupied by Spain for more than 300 years and this has lead to massive disparities in land ownership in the country.
During Spain’s reign, they issued royal land grants to colonists who built large plantations in Luzon.
The original idea of communal use was replaced with the concept of Regalian doctrine wherein lands were allowed to be privately acquired through the adoption of various laws implemented by Spain (Law of the Indies, Maura Law, Spanish Mortgage Law).
When the American’s came, they gave more power to the Filipinos in managing their own land.
However, many officials in the Philippine government simply took control of the Spanish haciendas and turned it into their own plantations, thus continuing the inequality of land ownership among our countrymen.
Nowadays, Republic Act 386, also known as the Civil Code of the Philippines, is used as the main guideline by which land control and ownership (including leases and rentals) of urban and rural lands.
Why Choose to Invest in Land?
Any investment has some degree of risk tied to it. And so as always, due diligence is required before you set forth on any investment ventures.
But in case you’re wondering what are the potential upsides of land banking compared to other investment strategies, here are 4 reasons:
- Potential for passive income: If you choose to hold the land (not sell it), you can profit from it via rentals from tenants (more on this on the next section). This can give you a nice source of cash flow that can last for years.
- You choose whether to buy or hold: Owning land gives you the flexibility of deciding how to earn from it. Say you chose to buy land and build apartment units. Aside from the passive income you’ll earn from rentals, you still have the option of selling it at a later time when the property has increased in value.
- You can earn from it quickly: Some investors just want to make a quick buck and avoid the “work” required in holding and managing land or property. So what do they do? Buy land then sell it right to the next buyer.
- Land appreciation: In most cases, land appreciates in value. This is because:
- They’re not making more of it (limited supply)
- Increasing population results in increased land demand
How to Profit From Land Banking in the Philippines
So how exactly do you profit from owning or selling land in the Philippines?
Much like owning similar types of property or real estate, there are 6 ways you can earn from owning land.
- Flipping (buy and sell): You buy a piece of land (at perceived lower market value) with the goal of selling it to another person or developer at a higher price. As with buy and sell, the strategy is to sell quickly and have very little work required on the seller’s end.
- Buy and hold: The goal is to purchase land and wait for it to appreciate. The person who invests using this method believes that the land will appreciate in value based on two main reasons: increasing demand and limited supply. As the population increases, so does demand for more land.
- Buy and build: Instead of selling the land for a quick profit, your goal is to develop it and take a different approach for profit. Perhaps you buy a piece of land and then have a house/apartment units/commercial building etc/mini-mart..etc.,
- Buy, build, then sell: A modified version of the previous strategy. After buying and building property on the land, you then sell it for profit. More investors will be more interested in buying it since the land has already been developed and the necessary structures have been built.
- Buy, build, then lease: Similar to the previous strategy but you’ll earn by renting out the property to others exclusively. Perhaps you buy a corner lot and then convert it into parking space or maybe have it rented for food park use.
- Buy and use: If you’re not interested in building property on the land you bought, you can use it for business or other income-generating purposes. Perhaps the piece of land is deemed good enough for raising livestock or growing crops or serve as excellent fish ponds (for raising fish).
Recommended Reading: How to Invest in Real Estate in the Philippines
What Can You Build on Land?
Here are some of the most common properties you can build on land.
|Office space||Single-family dwelling||Malls, commercial building|
|Retail space||Multi-family home||Farm|
|Mixed retail and residential||Hotel and resort||Parking spaces|
7 Tips Before Investing in Land
There is no exact science that will guarantee a certain property or land’s investment success.
However, there are some key variables that one should look out for when buying land.
These may help potential buyers to determine if the land is worth buying and if there’s a good chance of getting sweet returns on their investment.
- It should tick the main checkboxes of what you are looking for in the property (nicely fits what you’re planning on using it for)
- You project that the area will be experiencing a boost in the population (great if you’re planning on building a residential or commercial building on it)
- Is the area near other commercial and residential developments? An important factor to consider if you’re planning on using the land for rentals or building establishments that cater to customers or tenants.
- Check if the area is flood-free and safe from land erosions. It goes without saying but still worth checking—better to be safe than sorry.
- Is the area easily accessible by transportation? Train, cars, etc.,
- Timing is crucial. Buying land in a high growth location at the right time can bring in some pretty good gains on your investment.
- Be patient. More often than not, investing in land is a long-term game. If you’re planning on buying and selling land, patience is key. While reality TV shows make it look too easy, in truth, flipping land is not as simple as it looks.
How to Buy Land in the Philippines
In this section, we’ll go through the main steps in acquiring, buying, or transferring land titles in the Philippines.
It is highly recommended to seek professional advice if you need assistance with the entire process.
Step 1: Make sure you are buying from the rightful owner who has the original title
I know it sounds obvious but it’s still worth reminding people about.
You’ve probably heard of stories both in news and in real life wherein several parties are claiming ownership over a piece of land or property. That’s the type of situation we’re trying to avoid at all costs.
As mentioned above in our “history of land banking” section, ownership and titles go way back to our ancestors and in some cases, there’s not much clarity or transparency over the ownership of certain tracts of land as the years and decades passed.
This could result in some land titles being incorrectly (with or without their knowledge) passed on (or sold) to other owners.
The bottom line is, do your due diligence in making sure you are dealing with the right person and owner of the land you are planning to buy.
Get professional help when you can if it will help with the whole process.
Step 2: Acquire the notarized deed of sale with the signature
The Deed of Absolute Sale will state which party (seller or buyer) will shoulder the gains and documentary stamp tax.
Parties have 30 days to settle the fees with the BIR upon signing of the deed. A visit to the BIR RDO office will be required in order to secure and file the following documents:
- Deed of Absolute Sale (Original and photocopies)
- Transfer Certificate of Title (Original and photocopies)
- Tax Declaration for Land and Improvement (if applicable)
- Tax ID Numbers of both buyer and seller
Some situations may require additional documents so best to check with the BIR beforehand in order to avoid delays or confusion.
Step 3: Have transfer taxes assessed and obtain its necessary documentation
A BIR representative will have your Capital Gains Tax (CGT) calculated along with the Documentary Stamp Tax (DST). You will then be asked to sign copies of the following:
- BIR Form 1706 (for the CGT)
- BIR Form 2000 (for the DST)
The documents will be submitted and filed at their respective Authorized Agent Bank or Municipal/City Treasurer’s Office.
Step 4: File the CGT and DST documents at the BIR to obtain the Certificate Authorizing Registration
After submitting all required documents, you will be given a claim slip for when you can claim your Certificate Authorizing Registration (CAR) along with the following:
- BIR-stamped Absolute Deed of Sale (original copy)
- Owner’s copy of Transfer of Certificate Title
- Original copy of Tax Clearance
- Original copies of official receipts for all payments made (transfer fee, tax clearance certificate, DST, CGT)
- Original copy of Current Tax Declaration for land and improvement (as applicable)
Step 5: Obtain a copy of the new Tax Declaration document from the Municipal/Provincial Assessor’s Office
To do this, simply present photocopies of the following:
- Deed of Absolute Sale
- Certificate Authorizing Registration
- Transfer Certificate Title
- Transfer Tax Receipt
These typically get released within 5 days from submission of documents. Ownership of Tax Declaration should always occur only after the title of land has been officially transferred.
What to Look out for (Risks) When Buying Land in the Philippines
Land banking is no small deal (pun intended) as it can easily cost hundreds of thousands (or millions) of pesos.
It goes without saying that all necessary preparation and due diligence will be needed to ensure a trouble-free transaction. As a guide, here are some things to ask yourself before buying land.
- Is the Transfer of Certificate Title legit? To check, ask the seller for a photocopy of the land title so you can get the name of the owner and title number. You should then visit the Registry of Deeds at the local city or municipal hall to request for a certified true copy of the title by providing the information you obtained from the seller.
- Does the description of the land in the title matches that of the land itself? Technical descriptions are important, and you need to make sure (preferably with the help of a surveyor) that what is being described in the title is 100% accurate.
- Are the annual taxes being paid? Taxes are a pain to deal with especially if it wasn’t your own, to begin with. To be safe, ask for a copy of Tax Declaration and all related receipts/documentation confirming that taxes are paid regularly and there are no penalties.
- Is the seller the legit owner of the property? Request for identification documents to confirm that the seller is the rightful owner of the property. Check the names indicated as owner in the land title and verify it against the IDs you requested. It won’t hurt to ask the residents living near or familiar with the area for additional verification of the land’s owner.
- Is there any right of way issues? – This is often overlooked but very critical. Confirm if the land is bounded by a road or street, because if it is, you may be required to purchase right of way for the property.
- Is the agent selling the property authorized? Check if the broker has Special Power of Attorney (SPA) and if the authorized signature is valid. In some cases you might have to deal with agents instead of the landowners themselves, in these cases, best to ask if they have a SPA.
Key Legal Procedures and Transaction Costs When Buying Land
The Deed of Absolute Sale will be made and notarized by a lawyer once both parties (seller and buyer) agree on the sale.
Request for a certificate of Land Tax Declaration from the BIR for submission to the City Assessor’s Office. They will also assess the market value of the land to be purchased.
Transfer taxes (0.5% of the actual sale price) will be paid by the buyer of the land.
Both Capital Gains (6% of the actual sale price) and Documentary Stamp (1.5% of the actual sale price) taxes will be paid at the Bureau of Internal Revenue. Real estate tax will be paid by the buyer at the City Treasurer’s Office.
Once all required payments and documents have been signed, the Registry of Deeds will cancel the old land title. Registration fee is 0.25% of the actual sale price.
They will issue a new one reflecting the name of the new owner. He or she should then get a copy of the new land title and obtain the Land Tax Declaration from the City Assessor’s office.
Note that the percentages above apply for land purchased from individuals and not from developers or corporations.