You’ve heard it before: “land is the best investment.”
But is it?
Traditional wisdom says real estate usually appreciates in value over time. But investing in undeveloped land isn’t quite as simple as investing in a duplex. And with the economy issues of the last decade, consumers have been granted a firsthand look at the volatility of real estate and land, leading them to question conventional thinking.
The short answer? Investment in land can be a wise one. The trick, however is entering into the venture fully informed and with a game plan.
Before making a land purchase, consider these points.
1. Knowing what to look for in raw land is vital
Raw land is a catch-all term for undeveloped or unused land. When most people talk about investing in land, this is probably what they mean—buying an out-of-town parcel on the cheap and holding on to it until the time is right. Of course, what you see isn’t always what you get.
Here’s what to watch out for:
- Is the ground solid enough to accommodate your building plans (or the plans of future builders)?
- Is water accessible via a well or city hookup?
- How is the condition of surrounding properties? Does the seller have any agreements with them?
- Is there road access? Will you be able to get any large equipment you need into the property?
- Are there any zoning issues that could hamper your future plans?
No matter how good the deal seems, make sure you do two things before you buy. First, get topography, soil, drainage, and other similar reports done, so you know exactly what you’re buying.
Second, visit the land in person. This can seem like kind of a no-brainer, but many people buying undeveloped or remote land are satisfied with a couple satellite images.
2. Getting a land loan may be trickier than you expect
Buying land is harder than buying a house.
The logic behind is pretty simple. Because investment land isn’t a buyer’s primary residence (at least not in the near future), it’s much easier for owners to walk away from if finances get tight.
Most lenders will require a 20-50 percent down payment, and the interest rate may be higher. For this reason, investing in land is probably only a viable option for people who have plenty of liquid assets—and who don’t mind turning that money illiquid for an indeterminate amount of time.
Of course, this doesn’t mean you don’t have options when it comes to financing, though. Smaller local lenders may be more willing to offer you wiggle room, and some may even offer special programs for this kind of financing.
3. You need a plan for the length of turnaround
As with any real estate purchase, whether your investment pays off depends, in large part, on how long you plan to wait until selling.
Land purchased in 1970, for instance, will have enjoyed a significant increase in value over the years, despite the many market fluctuations. However, if you purchased land just before the housing bubble burst in 2007, you may be looking at a loss if you try to sell today.
There are 3 main courses of action you can take when investing in land, each with a different timeframe to follow.
- You can divide it up and resell to developers. This option is typically the quickest, but it’s still dependent on the land having increased in value to some degree since you purchased it.
- You can develop the land yourself for your own use or to sell later down the line. Building takes time and money, especially if your plot of land happens to be far from resources. For this course of action (even more than the others), you need to have the funds to finance your purchase—and then some—in case of a bad market or expensive setbacks.
- You can leave the land untouched and hold onto it until its value rises. If you want to reap serious rewards from your investment, you’ll need to be prepared to do absolutely nothing for a decade or longer. During this time, you’ll be forced to spend money to maintain the land while receiving no income from it.
4. Prepare for additional expenses
Even if you’re not interested in developing your land, that doesn’t mean you’re off the hook when it comes to upkeep. Whether you pay someone to cut the grass or you do it yourself, you’ll be required to concern yourself with land maintenance on a regular basis.
5. Remember to factor in taxes
Unless you’re planning on turning buying and selling land into a full time business (in which case you’d be eligible for small business and self-employment tax credits), you may find that taxes put a bit of a crimp in your plans to invest in land.
Even if you’re not making money off your investment (yet), you still have to pay property taxes. While you may not notice this tax when it’s rolled into your monthly mortgage payment, when presented as a bill, you’ll definitely be well aware of it.
Additionally, when it comes time to sell your property, you’ll be required to devote a chunk of the proceeds to the IRS.
Of course, there are a few tax deductions that make the whole thing easier to swallow. You just need to make sure you meet all the requirements and itemize your deductions on your tax return.
6. Look out for easements on your property
As a property owner, you should be aware of the laws pertaining to your property. In some cases, an easement on your property means others may be allowed to use it.
This can grant right-of-way to local utility companies, neighbors, or the general public, whether it’s a roadway that runs through the property or a power line that runs beneath it.
To find out if a property has an easement on it, look do a title search. The documentation stays attached to the title unless all parties involved agree to remove it.
7. You may be liable for injuries
Depending on the location of your property, you may also be at risk for a lawsuit if someone should become injured or die while on it.
You can help reduce those risks by installing “No Trespassing” signs on the property, but you should be aware of any injury risks on your property and take measures to repair them. This includes risks that could impact occupants of adjoining properties, such as falling objects.
Vacant land insurance is another great way to protect yourself, and costs are low when compared to insurance on occupied property.
The bottom line?
Land ownership can be a great investment, as long as you enter the deal with awareness of all of the risks and pitfalls. By conducting careful research, investors can take advantage of low property prices and purchase land that will be worth much more down the road.