Investing in Vacant Land

If you’re looking for the right investment opportunity, consider investing in vacant land.  Vacant land is simply land that has been undeveloped and therefore is ripe with opportunity.

There are plenty of benefits to investing in vacant land, as well as plenty of opportunities for what you can do with it, depending on how involved in the development you want to be and how long you want to hold onto it.

What Can You Do With Vacant Land?

If you have experience developing land (or hiring the right people to handle the work), you can develop it yourself. The sky’s the limit: you could build one or more homes, a farm, commercial property, or a multifamily building, depending on whether there are any zoning requirements for the land you’re interested in.

If you purchase a large tract of land, you’ll likely pay less per acre, and you can parcel it out and sell for more than your initial investment on a per-acre basis.

Another option is to hold onto it until a developer comes to the area and the value of the property increases. Often, when a developer has a plan for a new neighborhood or commercial district, they are willing to pay top dollar for any land that can be included in the project.

Additionally, you can use the land yourself or rent it out for recreational use, agriculture, or farming. If you use it yourself, your investment may take longer to see a return, as you’ll essentially be developing a property and then creating a revenue opportunity on the land.

If you’re fortunate enough to end up with a property that has valuable minerals or oil, you may be able to sell the mineral or drilling rights.

And finally, you may be able to lease part of the space for billboards, cell towers, wind farms, etc.

Pros and Cons of Investing in Vacant Land

While investing in vacant land may be a great opportunity for some, it’s not for everyone. Pay attention to the benefits and drawbacks before deciding whether it’s a good fit for your investment portfolio.

Pros

• Low cost compared to other investments
• Could be financially lucrative
• There may be grant opportunities
• May be less volatile than stock market
• It’s a tangible asset

Cons

• May be hard to sell in economic downturn
• You may overpay
• Best for those knowledgeable about land value and development
• Developing may be costly
• Financing may be more expensive and difficult

Exploring the Pros

Buying an undeveloped property may be more affordable than other investments, particularly if you can score an undervalued property. And if you understand land value, this investment could be financially lucrative, especially if you buy in an area that is being developed or can find a property that is in foreclosure. In both of these cases, you may be able to sell the property for much more than you paid, realizing a nice little profit.

Rural areas sometimes offer economic incentives if you develop business or housing there, so if you’re interested in land in a rural area, check to see if there are grants or low-interest loans you may qualify for. Some may have requirements not only about where the land is but also your income level.

Land may be less volatile than the stock market. While land certainly rises and falls in value over time, it sees fewer sharp ups and downs than the stock market does, which may make it a safer investment.

And if you dislike the fact that stocks and bonds aren’t something you can hold in your hand (beyond a piece of paper), you may appreciate that land is a tangible asset. You can feel the soil and have proof that your money is invested in something real.

Exploring the Cons

Land value rises and falls for several reasons. The state of the economy plays a role in how easy it is to make a profitable sale. If you’re in an economic downturn, you may find it challenging to sell the property for the price you’re asking, which may mean holding onto your investment until conditions improve. Most land increases in value over time, so you may get your best return by being patient and letting the land increase in value.

It’s important to be well-versed in land values; otherwise, you may end up overpaying for a property. This type of investment is best for investors who are knowledgeable about land value and development, so if you’re not, you may not be able to find a property that nets the return you’re hoping for or may grossly underestimate expenses for developing the land.

Speaking of expenses, if you plan to develop the property, the costs involved may be many, including outfitting the land for electricity and water, building costs, and permits, not to mention labor and material. These costs can cut drastically into your intended return.

And finally, something to consider: finding financing for a vacant land investment may be expensive and difficult. Lenders prefer you to take out a loan for a developed property and may have strict requirements to qualify for a vacant land loan.

A Word on Financing

It may be more challenging to get financing for vacant land than a mortgage for developed property. Typically, you’ll need strong credit, with a score of 650 or higher, and you may need to provide a down payment of 20-50%. You may also need to have another piece of land you can use as collateral for the loan.

Keep in mind that you’re not limited to taking out traditional loans. There may also be investors willing to partner with you on your project.

Are You Eligible for Government Programs?

Especially if you’re purchasing land in a rural area, there may be a grant or low-interest loan available offered by the government:

• FHA Construction Loans: Can be used for materials and construction, as well as the purchase of land.
• USDA Farm Ownership Loans: Specifically designed for farmers and ranchers who want to purchase, improve, or expand their operations.
• USDA Rural Housing Site Loan: Can be used for land where you intend to build a single-family home in a qualified rural area.

You can find information on grants offered by the USDA that you may qualify for here.

What to Consider Before Purchasing Vacant Land

Investing in vacant land is a decision that shouldn’t be taken lightly. Here are some things to explore before making the decision.

What is the property’s proximity to a developed area or city? The more rural it is, the less likely it may be to be snapped up by a developer, and it may be challenging to add utilities.

Are there any plans for urbanization that would impact the location? This can be positive if it means you sell for top dollar, but a pain if you find out a train plans to run right through the land you wanted to develop a quiet residential neighborhood on.

Are there any restrictions on how the land can be used? This may shape how the land can be developed and to whom it can be sold. 

What are the costs required to bring in utilities? Are there any difficulties in doing so?

What is the demand for land in this area (how quickly can you sell it raw)? What is its proximity to roads, and how much will it cost to build access roads on the property?

How much are property taxes on this land?

Are there any protected environments that would prevent the development of the property?

It’s wise to speak to the seller as well as local governments and development groups to get the answers to these and other questions.

Who is Vacant Land a Good Investment For?

Again, if you’re knowledgeable about the value of land, development, and building, buying vacant land could be a good investment opportunity. And if you don’t necessarily need to turn around the investment quickly, you won’t stress if you can’t sell it right away.

Also, you’ll need to have the right credit profile to be approved for a loan for vacant land.

Buying vacant land, whether you intend to break it up into smaller parcels or develop it, can provide a sizable return on your investment. Whether you exclusively invest in land or add it to diversify your portfolio, it can be lucrative in the right situations.