Investing in raw land: Is it worth it?
Ideas for how to make money in raw land
- Lease the land to someone, such as farmers or hunters
- Buy the land, hold it, then sell at a profit when value increases
- Develop the land and sell at a profit
Land investors: Are they geniuses or fools? Not surprisingly, the answer to that question isn’t black and white. As with rental properties and commercial buildings, raw land is an investment opportunity that could do exceptionally well, or not.
Investing in raw land has a number of advantages, but it also carries particular risks. The line between success or folly often rests with the amount of due diligence and research an investor carries out before investing in a particular property.
Raw land is a parcel that has no improvements: no buildings, nor sewer or power lines. It’s also referred to as undeveloped land.
How to make money with land
Investing in raw land allows you to pursue multiple investment strategies. For example, you could lease the land in rural areas to farmers seeking range lands or to hunters looking for sport. Or, you could employ the “buy and hold” investment strategy — purchase the land, then wait for it to appreciate and sell it at a profit.
You can also make money by developing raw land. For example, you could build a commercial building on an empty lot, then rent the building out. The presence of the commercial building makes the land more valuable, so you may be able to sell it at a profit in the future.
Advantages of investing in raw land
Land is a limited resource. No one is able to produce more land, so as it becomes scarcer, you can generally count on its value to increase. This can be especially true in sprawling suburban neighborhoods. That said, consider carefully investments in desolate, economically depressed areas.
Investing in undeveloped land may also help you avoid some of the headaches associated with developed properties. Since there are no buildings on raw land, you don’t have to worry about renovations, repairs or bringing facilities up to code. You just need to know ahead of time whether the land is suitable for future development.
Because it is undeveloped, raw land is often much more affordable than developed property. This can make it an ideal starting point for new investors.
Disadvantages of investing in raw land
Although the value of land generally increases, land can still have defects that stunt its growth opportunities. For example, if the area is prone to flooding or vulnerable to wildfires, it may be difficult to sell. You should also consider the possibility of contamination. It’s essential to have site inspections and hazardous material assessments before you commit to a purchase.
Land is also subject to zoning restrictions. You’ll want to research the zoning for any land you intend to purchase to make sure your intended use for the property conforms with the zoning requirements. If the zoning restrictions are too burdensome for developers, you may have difficulty selling the land.
Financing a land purchase
Borrowing money to purchase land is typically a little trickier than borrowing money to buy a house, because it’s riskier for lenders. If you’re buying a house that’s used as your primary residence, you have a greater incentive to keep making your mortgage payments. You have less to lose with a land purchase, since you’re not living on the land. There’s a higher risk that if something goes wrong financially, you’ll walk away from the land loan before you will the home loan. The lender will repossess the land, but undeveloped land can be more difficult to sell than a house, which makes it more difficult for the lender to recoup its loss.
Because of this increased risk, lenders generally require larger down payments for raw land than for improved properties. Expect to make a down payment of 20 percent to 30 percent, but possibly as much as 50 percent. Some lenders treat raw land loans the same as commercial loans, so in addition to the higher down payment, you might see higher interest rates and shorter loan terms than you would see with a residential mortgage.
The U.S. Department of Agriculture (USDA) offers low-income borrowers a loan program, called the USDA Section 502 loan, to purchase land in rural areas to improve the land and build a house. The section 502 loan is a direct loan, meaning the USDA funds the loan directly, rather than insuring a loan issued by a bank or other lender.