Is a Land Investment Right for You?

Mark Twain once said, “Buy land, they’re not making it anymore.” Based on the simple economics of supply and demand, this seems like good advice. But even when you’re considering an investment in a limited commodity like raw—also called undeveloped—land, performing due diligence is critical.  You need to feel confident that your investment will deliver a good return. Just as there are several factors that influence the value of brick-and-mortar property, there are many affecting the value of land, too. Read on to learn more about what to consider when you’re in the market for a land purchase, the pros and cons, and how you can make money investing in raw land.

Location, Location, Location

What are the three most important factors to consider when buying real estate? That’s right—location, location, location. Land is certainly real estate, too, so location can make a big difference in your investment decision.
In and of itself, land is not so valuable. What gives it value is the location. For example, compare a couple acres of infill land in the Oaklawn submarket of Dallas to two acres out in the middle of West Texas. Obviously, the price tags on these two pieces of property are different. That’s because one is located in a densely populated area that is surrounded by existing development, while the other’s location is in the midst of, well, more land!

Access, Access, Access

Another important influencer on the value of land is access. Land that is easy to get to is likely going to be of greater value. Take the time to visit the land you are considering to see whether or not there is proper ingress/egress and if it is public or private, paved, gravel or dirt.

Get to Know Your Neighbors

Knowing your neighbors includes determining who owns the land around the one you are interested in, as well as the comparable prices of nearby land parcels whether they are owned or currently for sale. Also, find out the previous sale price and how the property you are considering is zoned.

Get to know the neighborhood, too. Is population growth on the horizon? How about planned roads and nearby developments? You’ll also want to investigate getting utilities to the location. This includes sewer, water, gas, electricity, phone, cable and Internet. If your property is remote, then accessing these utilities may be challenging and expensive.

The Pros and Cons of Investing in Raw Land

Like almost any other type of real estate investment, there are pros and cons to investing in undeveloped land. Let’s take a look at some of the advantages.

First, vacant land is usually more affordable than developed land. Property taxes and fees are often lower, and the maintenance concerns that come with owning a building—plumbing, electrical, upkeep of grounds and common areas—don’t apply to raw land. Therefore, land can be a great investment strategy for those that don’t have the desire or time to deal with maintenance as well as tenants and managerial concerns.

Second, each land parcel is unique, having its own specific location, size and shape. The exact same land exists nowhere else on earth. Buildings, on the other hand, are not necessarily unique so their owners have plenty of competition in their markets.

Also, raw land is like a blank canvas, so you really do have the opportunity to create the highest and best use. Of course, there will likely be zoning restrictions to follow (or go through the process of changing), but you can be somewhat creative.

Third, rural land investment can potentially have an agricultural exemption, deferring a major portion of the tax until the property’s use changes. This was implemented to help farmers keep their taxes manageable as urban developers moved further out to rural areas. Please understand that the agricultural exemption only defers the tax and does not eliminate it!

And the downside?

1. There aren’t as many tax advantages. Raw land doesn’t have a structure to depreciate. In addition, there won’t be a mortgage interest deduction without a structure that could have a mortgage.
2. Little to no cash flow. There are expenses associated with land ownership, such as property taxes or the cost of improvements. Without rental income, you will need to consider other ways to cover those costs like selling gaming rights or the land’s timber if it is wooded.
3. Limited financing options. Traditional financing is often not offered to purchase undeveloped land, so buyers usually pay with cash. Therefore, you could be left with an illiquid investment if your plan is to build on the land, but the property doesn’t sell.

Have a Plan for Your Land

Before you purchase, you must have a plan for your land. In other words, what is the goal of your investment? There are several different strategies that could work for you. These include:

Buy and hold. Thanks to appreciation, land purchased now has the potential to become more valuable in the future. Therefore, buying and holding undeveloped land can be a long-term investment that provides a good return.

Buy and sell. You could sell the entire parcel or subdivide. In some instances, subdivided land can be more valuable than the whole.

Buy and develop. Depending on location and zoning restrictions, raw land could be developed into a residential, multifamily or commercial property. There may also be the possibility of a mixed-use development. And once developed, you could opt to sell or rent the property to an end-user.

Buy and lease. There are businesses that need to lease raw land. A land or ground lease can be written with a company that needs to rent your land for several reasons such as constructing billboards or cell towers, having land for cattle grazing or space for utilities.

Buying, developing or selling raw land can be tricky. A commercial real estate professional who understands the local market can help you find the investment opportunity you’re looking for, so you don’t end up repeating another quote from Twain: “I was seldom able to see an opportunity until it had ceased to be one.”

 

The information contained in this article is general in nature and should not be construed as financial, tax or legal advice.  As with any financial or legal matter, consult your tax advisor and legal counsel.