What Real Estate Investors Need to Know About Undeveloped Land
If you read many of our blog articles, you may have noticed that we love investment property. We believe that investment properties, while certainly never a sure-thing, are one of the best ways to utilize your resources and create a solid financial foundation.
But so far, we have largely discussed purchasing developed property; property with buildings already on the land. What about undeveloped land? Is this something that investors should consider?
Investing in undeveloped land can be lucrative but risky. You need the right approach, a proper mindset, plenty of patience, and (in most cases) an established financial footing.
Like any investment, the first step to realize profits is knowledge.
Investing in Undeveloped Land
What Do We Mean by “Undeveloped Land?”
By undeveloped land, we simply mean property that has no significant buildings or facilities on the property. There are no commercial buildings that could be used for offices, industrial purposes, or retail stores, and there are no domiciles where people could live. The property may have a few basic buildings, such as a barn or storage shed, but it is otherwise empty.
Undeveloped land is sometimes called “raw land,” and people in the industry often refer to this type of purchase as a “land investment,” implying that you are purchasing only land, not buildings or structures that add significant value to the property.
Does it Need to Be Developed in Order to be Profitable?
This is one of the most fundamental questions that people have when purchasing undeveloped land. Should you build on the property of simply leave it alone? There are reasons to do both, but many investors will actually leave the property as it sits and simply keep it in their portfolio. Over the years, the property will gain value, so when you sell you may realize significant profits if you can find the right buyer.
If you choose to develop the property, you will obviously need to make significant purchases to modify that land as needed. Building a new residential property can become incredibly expensive, so many owners will need additional loans to develop the property.
What are the Benefits of Land Investments?
There are risks and rewards for every investment decision you make, and purchasing land is no different. However, there are some inherent rewards that come with owning raw land.
Undeveloped property generally grows in profitability because it’s a finite resource. There is a fixed amount of land available, but the population is growing, so the classic supply-demand factor tilts heavily in favor of land owners.
For investors, there are numerous advantages, including the fact that undeveloped land can be easy to acquire. What you do with it after acquisition can be more of a challenge, but during the purchase process you will have less competition in the form of other buyers. Think about it: how many people do you know who have purchased developed property, either residential housing or commercial lots? Now how many people in your circle own undeveloped land? It’s likely the owners of developed land far outnumber the owners of raw land, and this reduction in buyers can work to your advantage, as you won’t have to aggressively and expensively outbid other investors.
Undeveloped land is also easier to own and maintain. You won’t have to worry about maintenance, such as new roofs or gutter cleaning, and you won’t have to repair inevitable problems that come with buildings like homes and offices.
With undeveloped land, you also have flexibility, as you can either hold the property or sell immediately for a higher price, assuming you can find a motivated buyer. Holding the property gives you the chance to increase the value of the land, while selling allows for quick profits.
Regardless of your specific plan, the key to successful ownership of undeveloped property is to understand your exit strategy. Is your goal to quickly sell after purchasing the property at a discount? Will you develop the land and sell in parcels? Understanding your end game will result in far better profitability from your financial investment.
Downside of Land Investments
There are, of course, inevitable downsides to purchasing and owning undeveloped land, including the fact that financing can be harder to come by. This not only has an impact as you try to purchase, it will mean that potential buyers may not be able to finance a purchase, leaving you stuck with the property.
With undeveloped land, you are less likely to receive consistent income while allowing someone to use the land. Yes, there are ways to keep the land and make money (more on that below) but most undeveloped land doesn’t bring an income until the sale, so you could be stuck with taxes and other expenses while holding the property.
If you are developing the land, you will see numerous complications with permits and approvals. Property zoning plays a heavy hand in any conversation about land development, and you will likely need a parade of environmental studies, permit applications, zoning requests, and more before you can develop the land.
You Can Profit by Leasing Undeveloped Land
While most investors will profit on the sale of the land (either before or after it is developed) there are ways that undeveloped land can bring a steady income to your bank account. Most commonly, if the land can be leased out for farming, you will likely be able to get consistent annual returns on your land. Renting out farmland is a typical way for owners of raw land to make money from their property, but you can also lease the property out for hunting, fishing, or even harvesting resources like timber. Again, all of these depend heavily on where your property is located.
Get the Right Loan for Investing in Undeveloped Land
If you want to learn more about a loan for undeveloped land, contact our staff. We can help you get the best possible loan to fully maximize the returns on your next investment.