Earlier in the week, we discussed residential real estate investments including investment options, benefits, and limitations. Let’s look at raw land as an investment today. Land investment, as the name suggests, refers to investing in landed property without any major structures such as buildings or plants associated with it.
Scarcity is the most attractive feature of land as an investment. Yes! If you haven’t heard – Land is finite, and nobody is making any more of it 😊 Of course, we have seen land reclaim projects and man-made islands create new land but that is not on par with the population growth we have seen in the world.
Development land is the most common raw land investment option. Investing in Residential development land involves buying land with the intention of either developing a residential property for personal use or rental or selling the land to another residential real estate developer. Commercial development land investing involves buying lots of land with the intention of either using the land for building commercial spaces such as strip malls, industrial lots, parking lots, storage centers, office buildings, and retail spaces or selling the land to another commercial developer.
Investing in the right undeveloped land gives us limitless options to improve and profit from developing it in the future, but some of the limitations involved with investing in land include:
1. High upfront capital requirements, as it is not easy to find financing for undeveloped land.
2. No cash flows, until developed vacant development land doesn’t produce rent.
3. Limited tax advantages, financing costs are typically not tax-deductible like in the case of a mortgage on rental property.
Farmland is another popular land investment option. Investing in land used for row crops, livestock-raising, vegetable farming, and fruit orchards is considered farmland investing. Land purchased for farming operations affords the ability to enjoy the land in the homeowning sense, as well as from the standpoint of generating income. However, unless the land is leased there are a host of problems for small investors who purchase land to operate these types of enterprises.
1. Financing is a hurdle. Though finding financing for farmland projects is relatively easier compared to development land projects, it still requires significantly high upfront capital.
2. Fixed costs, maintaining the operation until it produces cash flows requires initial fixed cash outlays.
3. Unless leased, farmland maintenance can be extremely operationally intensive.