Is buying land a good investment? In most cases, the answer is yes – as long as you’re properly prepared.
Investing in undeveloped land, however, isn’t quite as simple as putting money down on a duplex. To ensure you’re making an informed decision, we’ve outlined our top seven tips to know before purchasing land.
1. Know what to look out for in raw land
“Raw land” is a catch-all term for undeveloped or unused land. When most people talk about investing in land, this is probably what they mean – buying an out-of-town parcel for cheap and holding on to it until the time is right. Of course, what you see isn’t always what you get.
When shopping around for raw land, be on the lookout and ask these key questions:
- Is the ground solid enough to accommodate your building plans (or the plans of future builders)?
- Is water accessible via a well or city hookup?
- How is the condition of surrounding properties? Does the seller have any agreements with them?
- Is there road access? Will you be able to get any large equipment you need into the property?
- Are there any zoning issues that could affect your future plans?
On top of these things, be sure to visit the property and get all of the standard tests done (topography, soil, drainage, etc.). No matter how good the deal may seem, you should always do your research to ensure you know exactly what you’re paying for.
2. Prepare for a trickier loan process
In general, buying land is harder than buying a house.
The reason behind this is fairly simple. Because undeveloped land isn’t a buyer’s primary residence (at least not in the near future), it’s much easier for owners to walk away if their finances get tight. In other words, it presents a much greater risk to lenders who usually look for the safest investments possible.
Because of this, most lenders will require a 20-50 percent down payment and higher interest rates for raw-land loans. For this reason, investing in land is usually only viable for people with plenty of liquid assets who don’t mind turning that money illiquid for an indeterminate amount of time.
Of course, this doesn’t mean you don’t have options when it comes to financing. Smaller local lenders may be more willing to offer you wiggle room, and some may even offer special programs for this kind of financing. Total Mortgage’s team of loan experts is also on standby 24/7 and would be happy to assess your unique situation.
3. Plan for a long turnaround time on your investment
As with any real estate purchase, the payoff of your investment will largely depend on how long you wait to sell.
Land purchased in 1970, for instance, has likely seen a significant value increase over the years despite many market fluctuations. If you purchased land just before the market crash of 2007, on the other hand, it will probably turn up a loss if you try to sell today.
There are three main courses of action you can take when investing in land – each with a different timeframe to follow.
- You can divide it up and resell it to developers. This option is typically the quickest but still depends on whether the land’s value increases with time.
- You can develop the land for your own use and sell it at later date. Construction takes time and money, especially if your land happens to be far from resources. For this course of action (even more than the others), you need to have the funds to finance your purchase in case of a bad market or expensive setbacks.
- You can leave the land untouched and hold on to it until its value rises. If you want to reap serious rewards from your investment, you’ll need to be prepared to do absolutely nothing for a decade or longer. During this time, you’ll be forced to spend money to maintain the land while receiving no income from it. The final payoff, however, will likely make a significant return on your investment.
4. Prepare for additional expenses
Even if you’re not interested in developing your land, that doesn’t mean you’re off the hook when it comes to upkeep. Whether you pay someone to cut the grass or you do it yourself, you’ll be required to keep up with land maintenance on a regular basis.
5. Remember to factor in taxes
Unless you’re planning to turn land investing into a full-time business (in which case you’d be eligible for small business and self-employment tax credits), taxes may present a bit of an obstacle to your plans.
Even if you aren’t making money from your investment yet, you’ll still need to pay property taxes. You may not notice this tax when it’s rolled into your monthly mortgage payment, but when it’s presented as a bill you’ll definitely be aware of it.
Additionally, when the time comes to sell your property, you’ll be required to devote a chunk of the proceeds to the IRS.
Of course, there are a few tax deductions that make the whole thing easier to swallow. You’ll just need to make sure you meet all the requirements and itemize your deductions on your tax return.
6. Look out for easements on your property
As a property owner, you should be aware of the laws pertaining to your property. In some cases, an easement on your property means that others may be allowed to use it.
This can grant the right-of-way to local utility companies, neighbors, or the general public, whether it’s a roadway that runs through the property or a power line that runs beneath it.
To find out if a property has an easement on it, conduct a title search. The documentation stays attached to the title unless all parties involved agree to remove it.
7. Know your rights and prepare accordingly
Depending on the location of your property, you may also be at risk of a lawsuit if someone should become injured or die while on it.
You can reduce those risks by installing “No Trespassing” signs on the property, but you should be aware of any injury risks on your property and take measures to repair them. This includes risks that could impact occupants of adjoining properties, such as falling objects.
Vacant land insurance is another great way to protect yourself, and costs are low when compared to insurance for occupied properties.
Learn Your Investment Options With Total Mortgage
Land ownership can be a great investment as long as you enter the deal with an awareness of all of the risks and pitfalls involved. By conducting careful research, investors can take advantage of low property prices and purchase land that will be worth much more down the road.
To learn more about the land-buying process, get in touch with a local loan expert at Total Mortgage.
Source: totalmortgage.com