Created on Thursday, November 05, 2015
Updated on Monday, February 26, 2018
by Land Century
If you purchased raw land with the intention of developing it, you may be feeling overwhelmed or unsure of how to start. Here are seven tips to help you develop your property confidently and as smoothly as possible.
1. Have a Plan for Your Land
Before you even purchase a piece of property, its important to have a plan for the land. Will you be building a single family home, multifamily property, or commercial structure? Will you develop property and use it as a retirement investment?
Determine your purpose for the land first and when you want to purchase it. Knowing this information will help you narrow down your results and find the right parcel of land. It will also help you obtain financing through your bank if necessary. Lenders will want to know how you plan on using the land before they grant you a loan. If you have a complete development plan with blueprints, that can further help you gain approval.
2. Know the Downside of Investing in Land
When the right opportunity arises, investing in raw land can be a very lucrative endeavor. However, this type of investment does have its fair share of drawbacks. For starters, land comes with very few tax advantages and cannot depreciate in value. This is a long-term, illiquid investment. Even when fully developed, selling the property quickly is usually not option. It can take several years before you start seeing any profits. Even if you never develop the property, there is still a risk that you might lose money when reselling raw land especially if you choose the wrong property.
For some owners, negative cash flow is a problem. In some cases, investors find that theyll owe more money on the land than theyre able to generate an income. And then there are investors who charge forward with their plans and spend more money than theyll ever get when reselling. Generally speaking, lenders consider vacant land a speculative investment. Oftentimes, raw land generates very little income and development costs can be very high. That said, raw land can still be a great investment. You just have to understand the drawbacks before jumping in.
3. Prepare Yourself for Potential Drawbacks
Very rarely does development go as planned and in a smooth and efficient manner. Expect to face problems and drawbacks throughout the development process.
Before you even begin the development process, its important to look for problems that may be hidden beneath the surface of the land, such as toxic waste, old wells, septic systems and cemeteries. Remember, theres often more to a piece of land than what meets the eye. There may be huge boulders under the surface of the land that could prevent you from digging a basement. And if you choose waterfront property, you need to make sure that the land is not part of a flood plain.
As a general rule of thumb, you want to learn as much as possible about the land before you purchase it. This will help you avoid as many pitfalls as possible during the development process.
4. Know the Total Cost of Your Purchase
The price of the land itself is just a small piece of the puzzle. Youll also need to factor in the cost of developing and clearing the land. In addition, its important to determine how much the land will yield once developed. In order to determine this, you may need to invest in environmental impact studies, property surveys, engineering services, permits, fees, and soil tests.
On top of all this, youll need to consider how much it will cost to run utility lines to the property, drill a well, and connect to a sewer line or install a septic tank. Sit down and calculate the total cost of purchasing and developing the property this way you have an accurate estimate of how much financing you will need.
5. Know When to Develop
A savvy land investor knows when to develop property. Just like with most investments, timing is everything. The local economy and demographics play a role in how lucrative the investment will be. It makes little sense to develop your property if developed land is already available at a much lower price.
Before you purchase the acreage, be prepared to walk away if the timing just isnt right. There will always be other opportunities in the future.
6. Dont Be Afraid to Hire Professionals
Developing raw land can be a complex process. If youre unsure of how to do something, dont be afraid to hire a professional who does. Real estate agents can offer help because they understand the local real estate market and can help you find a suitable piece of land. An agent can also help with negotiations and the transferring of the property.
Real estate attorneys can also be helpful. These professionals can check to ensure that the land is free of liens, that there are no access issues youll need to worry about, and that the property has a clear title. Getting help from professionals who have experience with buying, selling and/or developing raw land can help ensure that the process goes as smoothly and as quickly as possible.
7. Choose a Good Location and Research the Property
Naturally, you want to ensure that the property you are considering is in a good location with potential for growth. But a great location isnt enough to justify an investment in raw land. Its crucial that you research the property to find out as much information as you can. Its equally important to thoroughly investigate the land before purchasing.
Take a tour of the land and take photos. Locate the boundaries on the property, and look for any signs of hazardous waste. Find out more information about the local area. Is the population growing? Local development agencies can provide you with information about planned roads, development forecasts, building costs, and the costs associated with utility extensions.
Also, take a look at the prices of land parcels around the property youre interested in. Find out what the previous sale price for the property was and how the property is zoned. A thorough investigation of the land is crucial when determining whether to purchase a piece of property. While developing the land can be a complex and arduous process, the results are well worth the effort when the right piece of land is purchased.