People often preferred investing in real estate because it is associated with owning a tangible asset rather than owning a financial asset like stocks or bonds. Land is just one of many ways investing in property like rental residential or commercial property. Owning a fund which invests in real estate is an indirect means of investing as the investor is ultimately paying a manager to manage the capital.
While houses on top of the land can be worn out from use, it can’t be any more tangible than owning a title to a piece of land which never depreciate. Land is one of the oldest form of investments one could make and it has resulted in spectacular boom and busts cycles.
We have listed some real estate strategies every investor should know when looking to investing in land. As we noted in the other post we think the coronavirus will negatively impact on the real estate market property but as in any busts we think it is important to get your shopping list ready and be prepared for the next cycle. This means start doing research now and know what to do and look for when buying land.
Land values can be very volatile
Property values have been in an upward trajectory for decades with minimal blips. What is often overlooked is that land prices can be extremely volatile as the price will rise more than property prices during good times. At the same time when the cycle turns and property values fall, land values often fall more than the total value of the built up properties.
Ways to investing in land
- One way of buying is through subdivision releases and getting ahead of the pack. Sometimes it pays to buy wholesale and sell retail.
- Buying home and land packages directly from developers or builders in master planned communities.
- Online advertisements from sellers through real estate classified sites.
What to look when buying land?
There are a number of points to know or look for when investing in land. These will determine whether the price paid is good value and eventually are key drivers of long term returns.
Easily accessible with infrastructure links – The most important factor in long term value appreciation is more and more people are moving to the area where the investment is located. Simply land values do not increase in depopulating areas. It is critical for the land to be easily accessible or near critical infrastructure such as interstate highways or transport nodes.
Close to amenity and services – This include easily accessible to supermarkets and medical services. No one likes to drive 40 mins to do their weekly shopping and isolated locations is only preferable to a small portion of eventual buyers. The larger the buyer pool, the greater chance the price will rise.
Know what you can build – If you paid a certain price thinking you can build a three storey house but the zoning/permitting has a height limit of equivalent of two stories means that you really just overpaid for the land.
Contamination and flooding risks – Doing your due diligence to understand the history of the land. This is to make sure it wasn’t a rubbish tip or a dumping ground for wastes. Risks such as flood zone should be check if the land lot is located next water.
Buying land with utilities connection – This is more applicable to newly released land or greenfield development. Whilst some land look cheap, once the cost of connecting utilities such as electricity, water or sewerage can really add up. Therefore for a true apples to apples comparison amongst the option is to include the all the cost are included to make the land usable.
The right shape and limit slopes – sometimes odd shaped land can be cheaper and for a good reason. Odd shapes or sloped land are more expensive to build on so the price is taking into account the difficulty or risks of building the land.
The common theme from the points above is obvious, the long term return from land is the capital value gain. This means that the best outcome is to have the maximum among of points potential buyers want or pool of buyers. This means sometimes it makes sense to pay premium upfront if it ticks the all of the boxes above as the premium is likely to remain when you look to sell the land.
Know your exit strategy
One of the most famous adages in investing is that an investment is just a trade gone bad. So it is important to have a plan of what to do or a strategy at the onset as changing strategy after buying can be expensive.
1. Is it buying for speculation? either holding it in the short as a quick flip or long term investment in your portfolio.
2. To build a home and there is possibility of additional development profit
3. Create a rental property to hold
Risks of Invest in land
Negative Carry Asset
One of the most obvious outcome from holding vacant land is that it is a negative carry asset. This means that for the duration of when you own the land, the cost of owning the land outweighs any rent you would’ve earned.
There are minimal revenues sources aside from the minimal parking rent (even if any) to offset typical costs of owning land, such as land tax, interest and any costs managing the property. Contrary to popular belief, land owners should still carry landlord liability coverage in the event someone have an “accident” on your land.
Don’t be tempted investing in agricultural land
I know it is tempting to take the offer in the ads for rural land for sale under $100 000 because rural land is always so cheap. But did you know for some regions of US rural land hasn’t gone anywhere in years?
See the point above in regards to depopulation regions and the impact on capital values.
Avoid property marketers
Once you decide to buy land directly for your investment portfolio I would highly advise to do your own research in finding the right piece of land rather than relying on property marketers as their business is selling property to you rather than long term value creation.
Just remember their interest are not aligned with you and it is commonly known that in some instances they are looking to offload useless pieces which they acquired on the cheap to you. As they say the lands these marketers are pushing trading sardines and not for eating.