If you have a big imagination, you may be able to envision an incredible structure sitting on a simple piece of land. Instead of waiting for someone else to make that happen, what if you could do it yourself? With the right amount of research and planning, you can begin investing in land and make a large profit doing so.
Why Invest in Land?
Many people assume that the best place to invest is in existing structures. While not as exciting, investing in land can provide you with a whole host of benefits. Here are some of the reasons why you should invest in land:
- More accessible: Since land usually comes at a lower cost compared to existing real estate, this type of investment is more accessible for those without enough cash flow to invest in other areas. As a result, you can make the most out of the money you have.
- Return on investment: Investing in land really allows you to get the best bang for your buck by offering great returns on investment. This is because land is generally cheaper to buy and maintain — providing you with more profit at the end of the day whether you decide to sell, rent, or finance the property.
- Limited resource: Land is a limited resource that will always have a demand. After all, you can build new structures but you can’t make more land. As a result, land will always be valuable — especially as populations continue to grow.
- Large inventory: Even though land is a limited resource, there’s less competition for it than you typically see with developed real estate. As a result, you can get some great deals and really maximize your investments.
Risks of Investing in Land
Despite the benefits of investing in land, both small and large land deals come with a degree of risk. While land investment can be lucrative, here are some risk to consider before committing:
- Illiquid: Land is an illiquid investment, meaning it is an asset that cannot be easily exchanged or sold for cash. To sell your land for a liquid profit requires a long, complicated legal transaction between multiple parties with due diligence that can take weeks or even months. There’s also the matter of supply and demand. The lack of competition for land can be a double-edged sword, as landowners may have trouble finding a buyer for their plot.
- Does not produce income: Land does not earn interest or dividends, but landowners do have to pay taxes. Land is a speculative investment—its central gamble hinges on whether the land you purchased will increase in value enough to provide a fair rate of return in the future. When investing in existing real estate, there’s often the immediate opportunity to rent your space for a profit. Undeveloped land is less frequently used as a steady source of passive income. If you choose to build a structure on your land, there will be no way to produce income from your land while construction is ongoing.
- Difficult to finance: Obtaining land financing is more challenging than getting a standard mortgage, partially because the land itself cannot be used as collateral. New construction projects are prone to unforeseen complications, and many lenders will require a prohibitively high down payment because of the risks associated with the transaction.
- Entitlement risks: Even if you’re able to purchase your land, there’s always the risk that you won’t be able to get governmental approval for your planned projects. Code and zoning violations that were missed during your design study or new legislation that goes into effect during construction can similarly affect your project, as can agencies like parks and recreation, the mayor’s office, or the fire department as they perform their own reviews of your development plans. There’s also the possibility that your land has been polluted or has contaminated soil, environmental risks that will prevent construction. Finally, if a community opposes a land development project, the city council or the board of supervisors can cause delays, alter designs, or stop the project altogether.
- Development complexities: Once your project has been approved, there are myriad risks involved with the actual process of construction. This can range from property damage to material loss to equipment destruction. All of these unbudgeted costs can cause project delays and put an even more significant burden on your finances as you wait for the project to be completed.
Different Types of Land Use to Know About
In an ideal world, you could use land however you want. In reality, however, there are restrictions in place that dictate how you can use certain types of land. Depending on your area of expertise and how you want to invest, you may want to focus on certain zoning types. Here are the different types of land use that you should know about before you move forward with your plan to invest:
- Residential: Perhaps the most obvious way that you can invest in land relates to residential use. This involves single-family homes that can become a solid investment, especially in the age of COVID when people are increasingly looking to gain more space within a single-family home.
- Multifamily: That being said, investing in multifamily land through apartments and condos could also be a great investment. Multifamily land allows you to essentially stack residences on top of each other across multiple floors to achieve the maximum number of possible units. As the world begins to go back to normal and people go back to work, the demand for apartments and condos will go back up.
- Commercial: In addition to land designated for living purposes, there’s commercial land designated for business purposes that generate a profit. This designation includes everything from retail space to office space. Many businesses have reconsidered their office space priorities in light of COVID and are looking for new spaces to meet their needs. Additionally, we expect to see a resurgence of in-person shopping as people begin to transition out of a socially distanced world.
- Industrial: Industrial land is designated for business activities that don’t directly generate a profit, such as manufacturing, distribution, and packaging. These spaces often need to meet specific qualifications in terms of noise and emissions emitted.
Different Ways to Invest in Land
While you may see investing in land as a simple buy and lease scenario, there are actually a variety of different ways that you can invest in land. Understanding these different possibilities is key to making the best possible investment decisions.
- Flipping land: Just like you can flip a home, you can also flip land! If you can find land at a low cost, sometimes you can sell it at a profit with a small amount of effort. In other cases, you may need to take actions that increase profitability, such as zoning efforts, clearing efforts, subdividing the property, and applying for permits.
- Developing land: Developing land is typically what people think of when they consider investing in land. That being said, this option can be costly and time-consuming since you’re literally building something from the ground up.
- Buying and holding: Sometimes people simply want to buy the land and hold onto it -- anticipating that it will become more valuable or easier to develop in the future. However, keep in mind that you will still have to pay property taxes and upkeep costs while holding the land.
- Buying and leasing: There’s also the option to buy land and lease it out to tenants. This is a great way to establish a passive income stream that can cover the mortgage and upkeep costs of the property. That being said, you may have to effectively act as a landlord, something that not everyone is up for.
- Buying and financing: Finally, there’s the option to buy land and sell it while financing it for the new owner. Why involve a bank when you can act as the bank yourself? This is essentially what you’re doing with owner financing. While this also gives you passive income, it also gives you the option of receiving a down payment and interest for financing the property.
Best Practices for Investing in Land
Even though investing in land can achieve you a great return on your investment, success is never guaranteed. If you want to profit off of your investments, here are some best practices that you should follow:
- Thoroughly investigate the zoning surrounding any potential land purpose to make sure that it’s zoned properly. Be sure to research any possible restrictions that may come with different types of zoning.
- Estimate the amount of annual property taxes and upkeep that will count as additional costs on top of the purchase price of the property. This is especially true if you plan on holding the land without developing or leasing it right away.
- Research the demand for the specific type of property in the area. Look at value projections as well as trends in the area and the specific industry involved to ensure that it’s a solid investment.
- Determine whether or not there are any ingress or egress rights included with the property.
- Conduct a feasibility study for larger investments to help mitigate some of the risks involved in land investments.
How to Finance Land Investments?
Clearly, land is a great investment opportunity that’s usually cheaper than real estate. That being said, land can still come with a hefty price tag that may be difficult to manage on your own. So how do you pay for it? If you cannot pay for land in cash, you will need a loan. There are several different loan options out there to consider for land investments, however, bridge loans are a particularly promising option.
Bridge loans provide you with near-immediate financing with reasonable rates that you can effectively use as a “bridge” until you can secure permanent financing. Bridge loans are especially appealing for land investments as you may see a killer deal but not have the cash flow to pay for it on your own. Instead of waiting for traditional financing to be approved and losing the deal to a more competitive cash buyer, you can purchase the property quickly using a bridge loan.
This type of loan typically involves fewer qualifications than traditional loans from big banks. For instance, they don’t base the approval process entirely on your credit report. Although this is one component, they also consider things like collateral and are generally more forgiving towards minor credit delinquencies.
Although not all lenders offer bridge loans, Vaster Capital is a reputable lender that specializes in this type of loan. In fact, we have helped investors secure financing for multi-million dollar projects -- and we can do it for you too! We at Vaster Capital prioritize transparency and communication to make the process as straightforward and smooth as possible.
Final Thoughts on Investing in Land
With this information in mind, it’s time to get out there and find the perfect plot of land to invest in. The right type of loan and a responsive lender can help you make this happen, so reach out to the lending experts at Vaster Capital today for more information.
Types of Zoning | FindLaw.com
Unlocking The Secrets Of Land: How Two Entrepreneurs Have Transformed Property Development | Forbes
What is a feasibility study? Definition and examples | MarketBusinessNews.com