If you were to take a poll of one hundred or even a thousand real estate investors, you'd likely come up with just about that many ways of doing things. This drives home the point that real estate investing is not an exact science; indeed, there are laws, procedures, theories and probabilities to contend with, but a concept just as important as all these that must be factored in is the human element. However, there's one line of thinking that virtually all of those investors would probably agree on, which is that undeveloped land is the riskiest of all the different types of real estate investment vehicles. Financial advisors generally counsel against land purchases for almost all independent investors; saying that it is, at best, a place to invest only money that you're quite sure you won't be needing anytime soon. But what makes investing in land so risky? Well, here are some issues to consider:
- The majority of raw land purchases generate no income during the period of ownership, thereby creating a negative cash flow situation due to the accrual of ongoing property taxes.
- Because land is fundamentally considered indestructible, there's no depreciation allowed for federal income tax purposes.
- The municipality in which the land is located governs by zoning how the land can be used.
- Development of the land is also subject to environmental testing and regulations.
- Raw land is the most illiquid investment of all of real estate; which, as a whole, is considered to be an illiquid investment genre. It can take literally years to sell some land parcels, and others truly may not be marketable at any price.
So, with such negative factors against it, why do people continue to buy land? The answer is simple, and you can probably guess what it is: as with so many other things, the answer is money.
For hundreds of years in America (and doubtless around the globe), vast fortunes have been made in land. It can often be purchased extremely cheaply, and with little or no effort at all it can bring a return that's many, many times its original investment cost. That, in a nutshell, is the attractiveness of land. However, even though foresight and knowledge play a very important role in successfully investing in land, it must be mentioned that luck and chance are often just as vital.
Investing in raw land brings its best return when the land lies along a path of expanding economic growth and prosperity. But such expansion is not guaranteed, and its path can often change directions. Increases in land value are virtually always dependent upon the land's future use, economic growth, and demographics, which all boil down to the fundamental law of supply and demand.
The value of land can appreciate with near-painful slowness, or it can rocket upward literally overnight. Have you ever heard of a place called Disney World? Well, did you know that the majority of the land on which Walt's theme park is situated started out as swampland? Now, think for a moment not just about that land but also about the rest of the land in the vicinity of Orlando. Not only did the value of the swampland explode, but everything from residential building lots to large tracts also went up in value the day after the Disney corporation announced its' plans to build there. And it still continues as the value of land appreciates in an ever-widening spiral around that area. If you'd already owned that swampland - or had a hunch about what Disney was going to do and bought it - an inexpensive land purchase could have returned a fortune of absolutely ridiculous proportions.
As previously stated, although successful land investment is often a combination of foresight and luck, having an understanding of this type of real estate can certainly increase the investor's odds for success. There are three basic types of land investment: long-term holdings, subdivision and development, and speculation. Let's take a quick look at each of these areas.
Long-term holding is a no-work, no-worry (at least not much) form of real estate investing. You buy a parcel of land that's generally considered out-of-the-way, far from everything. You then sit back and wait for growth and development to move toward your parcel, or you begin hoping and praying that some major corporation will announce plans to locate its headquarters or a new branch either on your land or nearby it (see Disney above!). As your land becomes less out-of-the-way (in other words, as growth closes in), its value begins to increase. When the value reaches an acceptable level, you sell.
The challenge of this type of investment lies in the fact that there's no way to be sure that growth will move in your direction or if it will continue along that path, or how long the movement will take to reach the vicinity where your property will gain from it. And in the interim, owning the land will cost you money in the form of property taxes. Long-term land investment, therefore, is acceptable if you have money that you're sure you won't need for a long while.
Because of the time, expertise, and money necessary for the subdivision and development of large tracts of raw land, few individual real estate investors choose this route. On a somewhat smaller scale, however, there are opportunities for profit by starting out in parcels of land that can be subdivided into several or more lots. This entry strategy works especially well when there's a house already located on the property.
Land speculation seeks a much faster return on risk and investment. The speculator usually sees (or sometimes just imagines seeing) some type of growth, development or change coming. As such, he or she considers that there will soon be both a need and a general desire for a possible change in the use of a particular parcel of land. With the change in use, there will be a greater demand for the land and therefore an increase in its value. Using options or other methods (few speculative investors actually buy and pay for their land investments), the speculator gains control of the property in order to profit from it.