Pros and Cons of Buying Land as an Investor
Land offers a unique investment avenue that can provide various benefits and challenges. In this article, we will explore the pros and cons of buying it as an investor, so you’ll know what questions to ask and things you should consider before jumping all in.
What types of land can be purchased as an investor?
While this may seem self-explanatory, there are types of land beyond farmland and forests you can purchase as an investor. For example, there are:
Residential land: Land intended for residential development, such as plots for single-family homes, townhouses, or apartment complexes. Residential land can be purchased for future development or to generate rental income.
Commercial land: Land zoned for commercial purposes, such as office buildings, retail centers, hotels, or industrial facilities. Investing in commercial land offers potential for income through leasing or developing commercial properties.
Agricultural land: Agricultural land is used for farming, cultivation, or livestock purposes. Investors can purchase farmland to lease to farmers, develop agricultural projects, or explore other agricultural investment opportunities.
Vacant land: Undeveloped or unimproved land without any existing structures. May be purchased for future development, speculation, or as a long-term investment for potential appreciation.
Industrial land: Industrial land is designated for manufacturing, warehousing, logistics, or industrial purposes. Investors may choose to develop factories, warehouses, distribution centers, or other industrial facilities.
Recreational land: Properties suitable for recreational activities, such as lakes, forests, or mountainous areas. Investors may acquire recreational land for development into resorts, recreational facilities, or for conservation purposes.
Mixed-use land: Mixed-use land may combine residential, commercial, and industrial elements within a single property. Investors may purchase mixed-use land to develop projects that integrate multiple functions like housing, retail, and office spaces.
While land can be a very profitable investment, you may also want to consider:
Pros of Buying Land as an Investor:
Stability and Tangible Asset: Land is a tangible asset that generally holds its value well over time (as they say, they don’t make it anymore). Unlike other investments that may be subject to market volatility, land often provides a stable investment opportunity. Regardless of economic conditions, land retains its intrinsic value and can serve as a secure investment option.
Appreciation Potential: Historically, land has shown a tendency to appreciate in value over the long term (in many ways, it’s almost like buying a bond from the U.S. government because you can bank on it improving its worth, even if it’s just a little). As population growth and urbanization continue, the demand for land will only increase, leading to potential appreciation. Purchase land in a strategic location, such as an area just outside of the urban sprawl, and you may see a huge return.
Diversification: Investing in land allows for diversification within a portfolio. By adding land to your investment mix, you can reduce risk exposure from solely relying on stocks, bonds, or other conventional assets. Diversification across asset classes is essential for risk management, and land provides a unique avenue to achieve this diversification.
Income Generation: Land can generate income through various means, such as leasing or development. Investors can lease land for agricultural purposes, recreational activities, or even cell tower installations. Additionally, land with development potential can be subdivided and sold for residential, commercial, or industrial use, providing substantial returns on investment.
Tax Benefits: Owning land can offer tax advantages to investors. Property taxes on land are generally lower compared to developed properties. Furthermore, certain jurisdictions provide tax incentives or exemptions for land conservation or agricultural use. These tax benefits can enhance the overall profitability of land investment.
For Your Consideration: Real Estate Investing for Beginners.
Cons of Buying Land as an Investor:
Lack of Liquidity: Land is considered an illiquid asset, meaning it may take time to find a suitable buyer when you decide to sell. Unlike stocks or bonds that can be easily traded, the process of selling land can be more complex and time-consuming. Investors should be prepared for potential delays.
Holding Costs: While land can appreciate in value, it also comes with ongoing expenses. Holding costs include property taxes, maintenance, insurance, and potential interest payments if land is purchased through financing. These costs can accumulate over time and erode the returns on investment, especially if the land remains undeveloped or unproductive.
Development Constraints: Investors must be aware of any zoning regulations, environmental restrictions, or development limitations associated with the land. Some properties may be subject to strict development regulations, limiting the potential uses or profitability of the land. Conducting thorough due diligence is crucial.
Market Volatility: While land generally offers stability, it is not entirely immune to market fluctuations. Economic downturns or changes in local market dynamics can impact land values. Investors should consider the potential risks associated with market volatility and conduct comprehensive research before making a land investment.
Expertise and Risk: Investing in land requires specialized knowledge and expertise. Understanding factors like soil quality, location analysis, local market trends, and legal intricacies are vital. Lack of expertise and research can lead to higher risks and potentially lower returns on investment.
How much of a down payment is needed to purchase land?
Land is harder to sell, so lenders typically require a larger down payment than you’d initially expect. This is because if you are one day unable to make your monthly payments, they will have a more difficult time recouping their investment should they have to foreclose on you. Because of this, you will need to put a larger percentage down.
While it depends on the lender, the type of land you purchase can affect the down payment. Undeveloped land, for example, may require a down payment between 30-50%.
At minimum, expect a down payment of 20%, but be prepared for more.
Conclusion
Before embarking on an earthy adventure, make sure you're prepared for the journey. Conduct thorough research, analyze the market, understand the local regulations, and assess your risk tolerance. Remember, every investment has its pros and cons, and investing in land is no exception.
Ultimately, whether you decide to take the plunge into land investment depends on your financial goals, risk appetite, and long-term vision.
Happy investing, Hipster!