Intro: 6 Tips to Investing in Land (Is Buying Land a Good Investment Today?
Investing in land has long been identified as an investment for the wealthy. However, with interest rates still low, many people are starting to ask, “Is buying land a good investment for me?”
In this article, we will discuss what land investment is, whether land as an investment is a good idea, and 6 tips for how to invest in land.
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When looking at different ways to invest money, you’ve probably considered stocks, bonds, and mutual funds. Once you’ve met your IRA limits, you might start to think about investing in land. But first, what does investing in land really mean?
Buying land is a form of real estate investment, but unlike owning a rental property or other buildings, raw land doesn’t generate an income. Instead, the goal of investing in land is to own property that can eventually be sold for more than the purchase price. To successfully use land as an investment, the buyer has to perform due diligence—or pay the price.
Types of Investment Land
If you’ve been asking yourself, is buying land a good investment, then it’s time to explore all the different types of investment land available. Most everyone is familiar with land slated for commercial or residential development, but there are several different ways to invest money besides raw land, such as:
- Farm land, both livestock and crops
- Recreational use for outdoor sports
These ways of using land happen after a raw land investment and require additional funds to develop. Usually when talking about investing in land, it means buying undeveloped property that can later be used for other purposes or sold to developers.
Another way to look at raw land investment is in terms of what the investor has in mind to start with. As defined by Finweb.com, you can break it down into three categories:
- Long-term holding in which an investor waits for the area around the land to develop, at which point it becomes profitable to sell
- Subdivision and development—generally for larger investors who see an opportunity to sell parcels of land
- Speculation investing, in which an investor senses it’s a good time to buy because of developments soon to come
These three ways of investing in land are unique to the type of individual or corporation doing the purchasing. Each type of land investment has a different level of risk and caters to differing objectives.
For example, a person who seeks a long-term land investment is probably interested in a low-maintenance property and is content to have their money parked in a property that might not see another buyer for several years. On the other hand, speculation investing is for a person who might be buying land on a hunch and has money to put at risk.
Pros and Cons of Investing in Land
Now that you’re familiar with the different ways to use land as an investment, you still need to decide, is buying land a good investment? The answer: it depends. As with all investments, investing in land is good for some people based on their investment objectives and other factors.
- No tenants means less time commitment from the owner
- Renovations and repairs aren’t required
- Undeveloped land is less expensive than developed properties
- Value of land goes up over time (in most cases) because it’s a finite resource
- Flexibility to either resell property as raw land or develop and sell for a much larger price
- Financing future buyers allows owners to make more money
According to Bankrate.com, some lenders will require as much as a 50% down payment on undeveloped land due to the riskier nature of financing investment land. Many land owners have found that by offering financing to future purchasers themselves, they can charge a higher interest rate and make more money.
The other big benefit of buying land for investment rather than a developed property is not having renters and tenants to handle. The amount of time spent on collecting rent, repairing and maintaining a property, and handling complaints makes developed property less attractive to some people who are looking for different ways to invest money.
- Land is not a liquid asset
- Property is unable to be developed, either due to topography or zoning
- Taxes must still be paid on a land investment
- Zero cash flow
Forbes.com even calls investing in land one of the 6 worst real estate investments, due to the fact that raw land doesn’t generate rental income.
The other big problem, at least for smaller investors, is that investment land can’t be quickly liquidated should the owner need access to cash.
Many people who are experienced in buying land for investment know that research is key in finding a good property. However, some people who are inexperienced at buying land fail to realize that there is often a reason that the land is vacant. For example, zoning laws might prevent development, or the land doesn’t have access to utility lines, or the odd shape of the lot makes it impossible to use.
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6 Tips for How to Invest in Land
If you’ve already asked yourself is buying land a good investment and answered yes, then you need to know what comes next. The first step starts with you and your investment objectives.
1. Ask yourself key questions to clarify your objectives
- Why do you want to own land?
- What do you plan to do with it: develop it or leave it as raw land?
- When do you need a return on your investment?
- What is your risk tolerance?
- Are you satisfied with a non-liquid investment?
- Do you need cash flow, or can you park your money?
- Is buying land a good investment for you?
Be clear on your investment objectives before you start. You have to know what you want to do with the property—and what you want the property to do for you.
2. Walk the property
Many people who are used to investing in land buy without ever having seen the property in person. There are many ways to investigate investment land such as Google Earth, topography maps, and real estate websites.
However, if you’re new to buying land for investment, taking the time to see the property in person will help you head off potential problems. Look for items such as:
- Potential drainage issues
- Shape of the property
- Surrounding properties
Sometimes visiting the site can show you what a satellite image can’t: whether or not you’ll be able to resell the lot. There’s usually a reason that it’s vacant in the first place. Perhaps there’s an issue with neighboring properties such as old gravesites or Dumpster areas. It never hurts to see with your own eyes what you’re buying into and whether the investment land is truly a good deal.
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It may also be a good idea to get topography and soil reports, according to US News. They also say to make sure the current owner hasn’t made agreements with neighbors concerning access or parking.
There are other considerations, such as whether the investment land has road access and if it’s located in a flood zone. All of these factors will determine whether or not the property is suitable for your purposes.
3. Check out zoning issues
Depending on why you want to use land as an investment, you’ll need to make sure the local zoning for the property is compatible. For example, if you want to purchase land to eventually grow a vineyard, you’ll have to make sure you’re not buying land in an industrial zone.
You should be able to find out the zoning of an area by asking the property’s seller or by going to the local government office and asking for a zoning map.
4. Look for utility hookups
Is the investment land already set for electrical, sewer, and water hookups? If not, you need to find out if the hookups are available at all and what the cost will be to lay the lines.
If there isn’t currently water access, you’ll need to know if you can drill a well, or if water will have to be hauled to the property. Again, there are cost considerations to factor in, and these should help you decide whether the investment land is right for you.
Even if you plan to simply sit on the land and let it appreciate rather than spending money on development, you need to realize the impact of not having water and utilities already available when you decide to sell.
5. Investigate the tax situation
Remember, there is no cash flow when you own investment land like there is with rental properties. Because you do not have income from the lot, you will be in a negative cash flow situation each year because of property taxes.
Make sure you know what the applicable taxes on the investment land have been in the past, and what they are projected to be going forward. According to ROI Land Investments, anything above 4% of the market value should give you pause.
There are other tax implications to consider. Assuming you are not a real estate developer, a regular investor can deduct property taxes on their Schedule A as a personal itemized deduction, according to Nolo.com. Of course, all tax situations should be discussed with your accountant, based on your individual circumstances.
6. Secure financing
Many banks are reluctant to lend money for investing in land. Bankrate.com says that raw land is the hardest kind of property to borrow against. Lenders will generally require between 20% and 50% down on the loan.
Because these loans are harder to secure, many property owners will offer financing to potential buyers. Make sure to investigate all your options for the best deal on interest rates, repayment options, and other terms of the loan.
Is Buying Land a Good Investment?
Now that you know how to invest in land, it’s time to decide if it’s the right option for you.
Investing in land is good for people who:
- Are long-term investors
- Have other, more stable investments
- Do not require a cash flow
- Have a higher than average risk tolerance
- Are able to pay the property taxes
- Enjoy a low-maintenance investment
- Are able to self-finance or have plenty of cash for a down payment
- Have done their due diligence
No investment is guaranteed to bring a payout, and the same is true for investing in land. The risks involved in buying land for investment purposes are mostly due to the illiquidity of raw land. Just because land generally appreciates doesn’t mean that the value of a specific property will automatically rise.
If you’ve decided that investing in land is right for you, make sure to work with a real estate professional who is experienced with buying and selling investment land. A professional will also have ideas about locations that are projected for future growth, increasing your odds of selling the property in the future.
With some planning and forethought, you could position yourself for a solid land investment as part of your long-term wealth building strategy.
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