Thinking About Buying Land Because They Arent Making Any More

That saying has been around about as long as humans have been investing in real estate. It’s led some to substantial fortunes and bankrupted others. It’s back in vogue right now as land values have declined precipitously.

So should you jump in? Well, first let’s consider the two typed of land investor and the risks each assumes.

First understand the economics of land. It is like precious metals and other investments of that ilk. They may be worth more in the future but at the time of purchase, they generally don’t generate any income. In fact, taxes and other costs can render them as negative cash flow investments. Often the carrying costs for land can be offset by converting it to some marginal use. You might build a golf driving range on it or if it is fertile, lease it back to farmers for cultivation. In the end though, the reality is that breaking even is usually about as good as you will do.

Now the first type of land investor generally buys with a long term hold in mind. His time horizons are measured in years if not decades and typically this type of investor tends to be a low leverage type of borrower if not a cash buyer. This buyer will typically buy either land that is sure to offset some of his cost as outlined above or buy land that has extremely low carrying costs. Ultimately, he will typically sell to a land developer.

That brings us to the second type of borrower, a land developer. This buyer tends to buy land that is closer to existing new construction, thus probably in demand from builders in the near future. The land developer actively takes the steps to turn raw land into lots that are ready for a builder to construct homes and other types of structures.

The developer will take the land through the permitting process, work with architects on the permissible uses of the property, bring necessary infrastructure to the property and construct the roads sewers and other vital pieces that turn a piece of raw land into something viable.

The process is lengthy, complicated and costly as the land developer assumes not only the cost of the purchase of the property but the improvement costs as well. Most land developers have decades of experience and are closely tied to the local political establishment as the proper development approvals are key to a successful project.

So you can see that what looks like a no brainer involves substantial risk. Land investment is not something that is meant for the uninitiated. If you want to put some of your money into it you need to find a pro that knows his or her way around all of the details.

Yes, it can pay off big time and yes, it is intensely risky. Just ask some of the investors that have seen their land deals go back to the banks. They’ve lost everything.