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Is Buying Land a Good Investment?

When it comes to owning a home, one of the main pieces of value is often the equity it can earn you over time. And while the home itself has a lot of value, the land where it is built is a component of that value that is often overlooked. Buying land itself is an opportunity for investment- but is it a good one? Whether you are looking for a nest egg or building a home for sale in Winter Haven, FL, there are many reasons that purchasing land could be a good option for you.

The Basics of Buying Land

Before much of the country was populated with homes, buying land was how most people settled. Those who buy land today have freedom that is less common- to build a home or a business on the property or simply to own a piece of the world for themselves. But while buying land is a great idea, it does come with certain restrictions and guidelines.

Like any investment, buying land has some risk involved. You should always be sure to thoroughly research the land and the surrounding area, and get a proper estimate of current value and growth potential. It’s also critical to understand the zoning laws, both commercial and residential, that apply to the land. If you intend to use the land for a specific purpose, be sure that it is allowed to be used that way under all laws.

You’ll also want to take into consideration the stability of the land and what could be built on it, as well as factors a homebuyer would consider, like surrounding traffic and noise. Overall, it’s best to approach buying land like you would buying a home or business with great diligence.

There are three main courses of action you can take with land:

1. You can develop the land for your own use or to sell. In addition to the land, you will be investing in building on the land and ensuring all resources are in place. This may require separate financing and be subject to market volatility, but you can often make a lot of money on a quick turnaround.
2. You can divide the land and resell it to developers if you have purchased a large lot. While this can be quick, it will also be highly dependent on whether the land has increased in value.
3. You can choose to do nothing and hope the land accrues value over time. While this can have huge rewards, it will often take many years for the value to grow, and you’ll have to pay to maintain the land in the meantime.

How to Buy Land

Before buying land, you’ll need to determine how much you can afford to spend, including fluctuations for any unexpected costs. This will ultimately be a real estate transaction, so costs include a realtor fee and closing costs in addition to the price and permits.

The types of loans used for buying land will differ from typical home loans. With a traditional lender, there are three types of loans available:

• Raw land loans for buying a blank slate piece of land, with no electricity installed or other improvements previously made. This is the most difficult type of loan to acquire, so not all lenders will offer it.
• Unimproved land loans, for properties with a few amenities in place, like water and electricity. This can still be tricky to find, though easier than a raw land loan.
• Improved land loans are the most common form of land loans and are used to purchase a plot of land with features like a road, electricity, water, and other utilities already in place. Though these are easier to acquire, they require high down payments because of the risky nature of a land loan in general.

It is much more common to purchase land with cash than it is to do the same for a house. While not everyone has this option, it’s the best route where possible. When a loan is needed, the process is very similar to that of getting a home loan when the intent of the land is to build a home.

For commercial and agricultural properties, it is common to have a fixed interest rate for only a few years before moving to a variable interest rate.

Finding the Right Land

One of the biggest factors in determining if land is a good investment for you is the price at which you will need to purchase it. Many people look first at foreclosures on land in the area, as banks don’t want to hold onto the land and may be willing to let it go for very little money.

It may also be wise to look for land in rural areas where there is growth projected in the future. Urban spread or the potential for subdivisions to be built can make this land lucrative in the future. If you take this route, be sure to do your due diligence on what is expected for the future. You don’t want to make an investment based on a guess and have it fall apart, leaving you with land.

There is another option called land-hacking that is gaining popularity. In this case, you buy a lot of land and use some of it for personal use, while renting out the rest to help cover costs.

In addition to the cost of land, you will also need to be sure you look for the right elements, particularly with raw land. It’s advisable to have a full inspection done on the land to ensure nothing is missed, but some things to look for initially may include:

• Is the ground solid enough for any future building plans?
• How is water accessed- well or city hookup?
• What is the condition of the surrounding properties? Does the seller have pre-existing relationships?
• Is there road access? Could large equipment access the land?

If you do move forward, you should always have reports done on the topography, soil, drainage, and any other relevant information so that you have the condition documented and all your questions are asked. It’s also important to visit the land in person at least once- this is not always done for land purchases, but for such a large investment, it can be important.

Investing in Land

For buying land to be a good investment, you want to ensure that you are buying the right land. Considering factors like area, purpose, size, and zone will be critical in making these decisions. For example, farmland may be very valuable and gain equity quickly, as will land in a desirable neighborhood. However, undeveloped waterfront land may be a gamble because the frequent flooding can make it difficult to build and too volatile for a home.

There are certain uses of land that are more lucrative than others. Farmland, buying land that will be used as a campground, and flipping land are all popular and can have a great resale value if you choose to go that route.

Considerations

Buying land comes with a range of liabilities and considerations you need to make.

Any land you own will be taxed. While these taxes vary by state and city, you will need to understand what exactly they look like for you. Agricultural land usually has a very low tax rate compared to commercial or residential land, for example.

You may also need to obtain insurance for your land. In some states, even a trespasser can sue if they are hurt on your land. Vacant land insurance exists specifically for this and is relatively low in cost.

Environmental hazards are also important to watch out for when you purchase land. If the land is found to have something dangerous or requires work to make it adhere to environmental laws, you will be responsible for those costs.

Finally, check for easements on the property. Some land has grants built in that allow for others to use the land, like utility companies or even neighbors. This documentation will be attached to the title when you search for it.

If you do decide to buy land, be sure you have done all the necessary research to ensure you are mitigating risks and making the investment with all the necessary knowledge.

The Bottom Line

When it comes to supply, land can’t be replaced, and there is a diminishing amount of land available today. This scarcity makes it a popular investment and one that can reap great rewards with patience and hard work, but also a risky investment to make. Land often comes with legal, financial, and personal risk that you will need to take into consideration and be sure you have accounted for.

If you are able to do the proper research and purchase land that is in line with your plans, the investment is often worth it. Treating the purchase like a real estate transaction is critical so that you ensure there is no hidden pitfall or added costs you weren’t aware of at the beginning. With the right team on your side, this is possible and can have great results.