Land As A Quality Investment

Last updated: April 2018

Discussions of real property investment normally focus on single-family homes, multiple-family dwellings and commercial properties. Land rarely enters into the conversation, even though can often bring higher returns. Anyone can buy land, but there is far less competition than trying to land a stock or other investment that other people are vying over. And since real estate investors tend to sway towards apartments and homes that they can rent, you’ll be stuck in fewer bidding wars and will be able to negotiate on price.

Investing In Land

Why choose land over “classic” real estate investments? There are many practical reasons.

Land is usually low-maintenance. You rarely have a tenant, which means you won’t be receiving midnight calls on a Saturday night because of a broken toilet. You also won’t have the aggravation of trying to evict the seemingly-nice couple who refuse to pay rent and have trashed your property. In most cases, you’'ll rarely (if ever) have to even visit your property.

The second consideration when investing in land is financing. Getting a loan for any real estate investment can be difficult these days, as financial institutions’ easy money policies died with the recession of the late 2000s. Although it’s often more difficult to obtain financing for land investments than it is for a primary residence – that’s actually a good thing, because it has made seller financing the standard in land sales.

Seller financing is a boon for investors because terms are highly negotiable. Unlike a bank, a seller is likely to consider you a qualified buyer as long as you can prove you have sufficient funds to make the down payment and at least a few monthly installments. They’'re often this lenient because they’'re motivated to move the property. They’'d certainly prefer to receive a lump sum payment, but most are happy just to establish a cash flow if they can’t negotiate payment in full.

Property taxes are another advantage to purchasing vacant land. You’'ll only be paying tax on the land itself and not on structures, so your total yearly bill will be substantially lower. Taxes on large parcels can still be a drain, however, so be sure to take property taxes into account when evaluating land as an investment.

Finally, there’s the old Mark Twain adage: “Buy land, they’re not making any more of it.” He may have written that more than a century ago, but it’s just as true as ever. As the population continues to grow and cities are expanding outward, land will become scarce and therefore, more valuable. Whether it’s a couple looking to build their dream home or a corporation looking to develop a new shopping plaza, there will always be demand for land. In areas where growth is high, demand will be even higher.

Cash Flow

A common concern about land is that it can be a cash sinkhole. After all, there is nothing on the land to generate cash flow, so an investor must theoretically pay property taxes each year out of his own pocket. There are several ways to deal with this issue.

The first strategy is to invest in multiple pieces of land instead of just one parcel. A portfolio of land investments should include a number of short-term flip opportunities (such as land purchased in tax sales or from distressed sellers) mixed with longer-term investments. As the short-term investments are sold, some of the revenues can then be set aside to cover the costs of the longer term investments. This strategy is effective, but does require budgeting and discipline.

Another approach involves arbitrage via the Internet. You can purchase properties, and then through sites such as eBay or Craig’s List, you can resell them to small investors by offering financing. You’'ll make a profit as long as the money you are bringing in exceeds the amount you are paying to the original seller. Many who follow this strategy find that small buyers often fail to make payments for very long, so their down payment and any installments they do make are pure profit and the property reverts to you and can be sold again.

This concept of land arbitrage seems foreign to some investors, but it is actually the basis of many traditional real property investments. Consider a duplex apartment building. The owner uses rental payments to maintain the property and make mortgage and tax payments, and then pockets the difference as well as any long-term equity. This is simply arbitrage by another name.

Of course, you can always just hold on to the land and pay the yearly costs associated with it. Over time, land scarcity will almost certainly mean your investment will increase in value (as Twain correctly observed).

When you have land, you can make money in a variety of different ways. People need food and that will never change. One of the sure-fire ways to make money off of land is to farm it. If you don’t want to be a farmer (it’s hard work), you can:

• Lease the land

• Use the land for timber

• Rent the land to farmers

• Pay someone to farm the land

• Build on the land and rent the buildings

You can generate income from land if you’re willing to put up more capital to get operations started. If you just want to lease the land as-is, that can also be done. Many people lease land for crop growing, grazing, timber growing and even hunting.

Commercial and Residential Development

Keep a close eye on local markets, or markets across the country if you’re brave, and see where most of the development is taking place. Buying undeveloped land in these areas can offer a number of benefits. For one thing, the value of the property will rise as development continues. But you also have the benefit of potentially being approached by developers to purchase your property.

If you can’t find any reasonably-priced properties in the heart of where the development is taking place, consider buying land in outlying areas. Developers will likely be looking to these areas next.

You also have the option of owning a piece of the development, which you can do without having to be a large company. Or, you can decide to subdivide your property into several developments and turn an even higher profit. The only catch here is that you’'ll need to make sure that your property is utility-ready, meaning you’'ll need to cover the cost of running electric, phone and cable lines to your land. In some cases, this may be a costly endeavor, but if you can find the right opportunity in the right location, this could be a lucrative option.

Timing Your Investment

As with real estate, there are good and bad times to when it comes to knowing how to invest in land. If you had cash on hand, 2009 and 2010 were the best of times because of massive price drops when the recession was in full force. Prices were extremely cheap and it was one of the best buyer's markets in our lifetime.

Those peak years have passed, but we are still in a strong buyer's market as the recovery has been erratic at best. There are still plenty of quality land investments available in most areas.

The industry-standard Macromarkets LLC repeat-sales index reports that the aggregate market value of residential land is still down more than 40 percent from values prior to the recession. And the "recovery" now appears to be slowing again, according to a recent Wall Street Journal article reporting that the increase in U.S. aggregate land valuations had dropped from seven to four percent by late 2013. Buying opportunities remain strong.

Finding Properties

There is one crucial consideration when purchasing land. You should have a defined financial justification for your investment. This typically means that you should either receive a substantial discount over valuation, or buy in an area where rapid price increases can reasonably be expected.

Discounted land can typically be found through bankruptcy and property tax delinquency notices. There is plenty of information available on these approaches, so let's focus a different strategy: estate sales.

When a person passes away, their estate is distributed to heirs through trust or probate. Heirs rarely wish to own vacant land, particularly since they are going to have to pay annual property taxes on it. Additionally, estate taxes are due to the IRS within nine months of death. This usually creates extremely motivated sellers, who are receptive to low offers for “unusable” land parcels which will be a financial drain to them.

As an investor, you should contact estate planning attorneys in your area to let them know that you invest in land, and can help them unload any properties they are forced to liquidate. You will probably not see a huge number of deals, but the opportunities that will present themselves will usually be very profitable.

The other possibility is investing in land which you expect to increase in value. There is no easy method for finding those properties, other than searching for areas where impending development or existing restrictions are likely to dramatically force higher prices.

One example would be land in San Diego County, California. San Diego is bordered by Mexico to the south, the Pacific Ocean to the west, a huge military base to the north and national forests and deserts to the east. Land is already a valuable asset and prices reflect that fact. However, development continues in the region at a rapid pace, so purchasing land and holding it for the medium to long-term remains a strong investment opportunity because supply is extremely limited.

Similar examples are to be found in many downtown metropolitan areas, where redevelopment or reclamation efforts are planned or underway. This type of investment paid off in big ways during the gentrification of many American cities in the 1970s and 1980s and is still a viable strategy today.

Finding land in areas where prices will rapidly increase requires diligence and research. The more attention you pay to political and business developments in the areas you are considering for investment, the bigger your head start over other investors and the more likely you are to find lucrative land investment opportunities.