- Investing in land is often an afterthought, but nonetheless a viable exit strategy.
- Buying raw land may be a unique exit strategy, but when done correctly it can be particularly lucrative.
- Raw land investing is a lot different from buying pre-existing homes.
With the right knowledge and experience at their disposal, investing in land can be very lucrative for real estate investors. At the very least, those interested in buying land are only limited by their imagination and zoning regulations. However, the key to successful raw land investing is a unique combination of due diligence, hard work and attractive profit margins. Please continue reading if you are interested in investing in land with more confidence.
What Is Raw Land?
Raw land is a plot of land that hasn’t been used or prepared for building on; it’s completely untouched terrain. Despite an inherent lack of grading and subdividing for construction, however, raw land investing is becoming increasingly popular among real estate investors, which begs the question: Is buying land a good investment for everyone? Not surprisingly, the answer is completely dependent on what an investor may want out of a respective deal.
For some, raw land investing may sound counterintuitive. Likewise, investing in land should be reserved for those with more patience and a penchant for long-term strategies. Consequently, there are also several reasons someone may want to buy raw land. Specifically, investing in land represents a blank canvass for those with the foresight to do so properly—raw land may be developed into whatever the investor sees fit. Perhaps even more importantly, investing in raw land has become synonymous with persistent cash flow and appreciation.
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Does Land Appreciate?
Raw land is categorically and objectively an appreciating asset for two simple reasons: limited supply and increasing demand. There is a finite amount of available land that has yet to be built upon, making it a very attractive commodity in a world where the population is increasing exponentially. Therefore, in accordance with the most basic economic principle (supply and demand), raw land will inherently increase in value as demand grows for the limited asset. It is no longer a question of whether or not land appreciates, but rather how much it will appreciate.
How Many Years Can You Finance Land?
The amount of time a traditional lender will allow borrowers to finance a land investment will vary. There are several variables that will determine the loan duration one may expect to receive for raw land, not the least of which includes the plot’s location and its use. For example, lenders are more willing to extend their loan durations for plots of land that exhibit a degree of intrinsic value. If for nothing else, a promising plot of land represents a less-risky investment on the bank’s behalf. That said, those investing in land shouldn’t expect considerably long loan terms. Buying raw land typically coincides with short, restrictive payment terms. While some raw land investors may be able to increase the length of their loan, most terms will be limited to about 10 years or less.
What State Has The Cheapest Land Per Acre?
Not unlike every real estate exit strategy know to today’s investors, investing in land coincides with an inherent degree of risk. Raw land investing for future gains is far from a guarantee, but that doesn’t mean it’s impossible. The trick is to find relatively inexpensive plots of land with plenty of potential for future prospects. For those of you thinking about buying raw land with the intentions of making a profit in the future, here’s a list of five states where raw land prices remain affordable compared to their future potential:
- West Virginia
- New Mexico
6 Benefits Of Raw Land Investing
It goes without saying, but there are always risks and rewards associated with any type of investment deal, whether you are investing in raw land or not. The key, however, is understanding your exit strategy, weighing your options, and making the appropriate decision based on your desired results. That said, due diligence will ultimately define your success with a raw land investment. The current conditions of the market, demand for housing, mortgage rates, the local economy, and new housing construction will all play a critical role in how you benefit from your raw land investment, too.
For investors, the advantages associated with a raw land investment include:
- Easy to acquire
- Little-to-no competition
- Low cost to own and maintain
- Potential for quick profit
- Flexibility to build or hold
- Potential for passive income
Although the benefits of raw land investing are far and wide, they won’t be achieved without due diligence on the investor’s behalf. As part of your due diligence, running the numbers will serve to not only determine if you can afford the land, but if it’s actually financially viable. The numbers never lie, and in this case, they will almost always forecast whether your raw land investment is worth it or not.
Land Investment Tips: How To Invest In Land And Profit
Now that we understand the potential benefits of a raw land investment, it’s time to take a look at the various ways investors can make money by investing in land:
- Investors can divide a single plot into several plots to increase its value.
- Investors can develop on raw land to increase its use and value.
- Investors can simply buy and hold raw land, as it has historically appreciated more often than not.
- Investors can lease the land, long or short-term, for a number of reasons to collect rent.
Subdivide For Land Sales
The first way investors can make money off their raw land investment is by subdividing it for land sales. Investors have the potential to increase the total value of their investment by separating it into smaller lots and selling them individually to buyers. In many cases, the subdivided land can be more valuable than the whole. This is due to marketability, and the fact it might be easier to find a buyer for a smaller, more affordable parcel of land, as opposed to one large lot.
The subdivision process of raw land consist of two parts: mapping and legal documentation. The mapping aspect refers to the proposed subdivision area and how it should be defined, while the legal documentation involves submitting the proposed subdivision, which generally includes an application and fee, to the local county. If the application is approved, the subdivision mapping is recorded in the county records.
As cities expand, the flexibility of raw land investing continues to be its biggest strength. For many investors, one of the more popular ways of making money with raw land is by developing it into something more.
Depending on the location and zoning regulations, a raw land investment can be developed into a plethora of things, including a residential, multifamily, or even commercial property. In fact, a raw land investment can sometimes be developed into multiple entities, which can ultimately produce a multitude of revenue sources for investors. In addition, this land can become very valuable over time as home and rental prices go up.
Buy And Hold
Thanks to inflation, one of the primary sources of return on investment with raw land is through appreciation. Because the price of land today has the potential to become more valuable in coming years, buying and holding onto undeveloped land has the potential to earn viable returns for investors, especially in the long-term.
In addition, there are various options for investors to purchase raw land below market value. From auctions to county tax sales, investors have numerous options to obtain land at discounted rates, which will only enhance their ability to earn a positive return. Additionally, investors are recommended to conduct their due diligence when purchasing land through the auction process. In many cases, these deals can be full of risk with little-to-no upside.
There are many businesses looking to lease land on a monthly and yearly basis. Generally speaking, these operations need undeveloped land to conduct their operations. A land lease, which is also known as a ground lease, allows individuals and/or companies to rent a parcel of land rather than purchase it. In addition, a raw land investment can be leased for other purposes, including billboard rentals, cell towers, ranchers, and utility companies. This method of earning a profit is very similar to other types of leasing programs, which aims to earn a monthly return on the property through a lease agreement.
Is Investing In Raw Land Right For You?
In order to be absolutely sure whether or not raw land investing is right for you, ask yourself the following questions, and answer them sincerely:
Can You Manage Risk? Although raw land investing tends to be predictable, as with any type of investment, there is always some risk involved. If you are the type of person who is easily overwhelmed by the unknown or you are someone who jumps into things hastily, raw land investing is not a niche you should pursue. When you invest in a plot of land, you are essentially predicting the future. The moment you put money down on the table, you are saying, “I believe that what I am buying into will increase in value overtime.” While, in theory, you are probably right, there are some things that are out of your control.
Are You Financially Organized? When it comes to raw land investing, more than likely, you will not realize a profit as fast as you would if you were rehabbing or wholesaling properties. Because of this, it is crucial that you are vigilant about organizing your finances. This should not, however, deter you from undeveloped real estate. Because raw land is a buy and hold investment by nature, it can be a while before your land appreciates enough to produce cash flow. If you are a novice investor, you must perform an honest evaluation of where you stand financially. If you are a seasoned investor, you must assess the state of your finances in terms of your current investments and how you want your business to grow. If you are inherently frugal and make money saving a hobby, it is likely that you will realize success as a raw land investor.
Will You Prioritize Research & Due Diligence? Raw land investing is all about asking the right questions, and if you’ve never purchased vacant land before, you are probably not up-to-date on the jargon and terminology. Before investing in any land, it is vital to first research the market. Has there been recent development in the area? Is your plot of land in the path of future growth? If the answer is yes to either of the above question, your property already meets some crucial criteria. Next, you should talk to your lawyer, the seller, and you inspector’s about the zoning on the property. Are there clear boundaries drawn on the plot? Is it zoned for commercial, residential, industrial, mixed-use, or agricultural development? What was the land used for previously? Asking and getting specific answers to all these types of questions is an absolute must. Also be sure to ask questions about the land’s topography, required annual taxes, available public utilities, usage restrictions, and road access. Minding due diligence and researching the right questions are what sets apart the successful raw land investors from the not-so-successful raw land investors.
Do You Have Support? Unfortunately, raw land investing is not a “get rich quick” plan. It takes a lot of hard work and perseverance to realize success in the real estate investing world, which is why a solid support system is crucial to have. While it is important to rely on yourself as an entrepreneur, your own personal cheerleader is nice to have when times get tough. Whether this be a business partner, fellow investor, or family member, you are more likely to be successful compared to someone going into raw land investing alone. If you are having trouble finding your support system, consider joining a local REI group or even create your own meetup.com group. Isolate yourself from the naysayers in your life and find people who are there to help you stay motivated.
Investing in land is not a strategy without fault. Not unlike every other exit strategy in the real estate industry, raw land investing coincides with an inherent degree of risk. However, educating yourself on the topic will not only give you the confidence you need to commit, but also increase your chances of realizing success.
Are you interested in investing in land? Did this raw land investing primer help answer any questions you had on the subject? Please feel free to let us know your thoughts in the comments below:
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