Investors who are looking to diversify from stocks and bonds often look to real estate to provide stable long term returns. Some of the potential vehicles for real estate investment are rental properties, both commercial and residential, and vacant land.
Vacant land may be in the form or large tracts of farm land, undeveloped industrial property or single lots for homes. Vacation areas may have unfinished developments, where there is a substantial potential for growth and capital appreciation.
Oceanfront locales and golf communities often divide up large areas for housing development and sell the individual lots to people wishing to build homes. The lots can be used immediately to build vacation or permanent homes, or can be held for capital appreciation.
An Example of Land Investment
Using the example of a oceanfront or Oceanside property, an investor may look at housing developments in a vacation area (such as Hilton Head Island). There are often a number of developments that have yet reached completion, and investors may have the option to buy a lot before the property is built up.
If there are no restrictions on building, the owner can choose to build on the property or hold it with the hope of capital appreciation.
Positives of Owing Investment Land Property
- Land that has not been built on is likely to be much cheaper than prime vacation area property that already has been improved. It provides an opportunity for those with minimal capital to acquire a piece of desirable location.
- This provides a lower cost way for people to buy a lot at today’s prices with the intention of building their dream home sometime in the future.
- In times of capital appreciation, the smaller price allows for a much higher percentage return when sold. Even if there is no increase in the value of the land, the owner still has the option to build on it. If there is significant deflation in prices, the amount at risk is less than a lot with a house.
- If the land can be bought for a low price, it may be possible to turn around and resell it quickly, that is, flip the property. Flipping works during high growth periods (sometimes called “bubbles”).
Negatives of Land for Investment
- Unlike commercial or other residential real estate, no rent can be collected on vacant land, since there are no structures. It is possible to collect something if there are easements for power lines or other utilities, but this may compromise the ability to build or sell the land.
- There are expenses associated with land, primarily taxes, but there may also be costs of maintaining the property (cutting grass or other upkeep). Lots in desirable developments may have owners’ association fees or mandatory country club memberships.
- If the property cannot be flipped, the owner expecting a quick profit may be stuck with a property they have to sell at a loss, if they can sell it at all. If the property is financed, the investor may be forced to default on the loan and lose the entire amount of his equity.
Buying a lot is a quick way to invest in real estate, but without the income that comes from renting the property is a risky strategy for the novice investor.