Land investments are the most basic real estate investment strategy. They are raw investments, giving you the ability to start something from scratch and to build basically anything you desire. What makes buying land an attractive option is the flexibility of location. Land can be used for residential real estate, commercial estate, farming purposes, or just left to appreciate.
Land development is altering the landscape in any number of ways such as: Changing landforms from a natural or semi-natural state for a purpose such as agriculture or housing. Subdividing real estate into lots, typically for the purpose of building homes.
In an economics context, land development is also sometimes advertised as land improvement or land amelioration. It refers to investments making land more usable by humans. For accounting purposes it refers to any variety of projects that increase the value of the property. Most are depreciable, but some land improvements are not able to be depreciated because a useful life cannot be determined. Home building and containment are two of the most common and the oldest types of development.
Moving land from a lower to a higher stage adds value, but also adds cost, work, and risk. However, the value added is not the same for each transition, nor is the associated cost, work, and risk. Examining these potential stage transitions yields a clear land investment strategy, one that has been employed by successful investors for decades.
Types of Land Investments
Independently wealthy people can purchase land for personal use, recreation – and yes, investment. Unfortunately, most people do not fall into this category. This begs the question: Are land-ownership opportunities and business ventures capable of generating an acceptable return on investment for small investors, while still affording them the joys and attributes associated with land ownership? To answer this question, you need to be able to evaluate 10 general categories of potential land investments:
* Residential development land
* Commercial development land
* Row crop land
* Livestock-raising land
* Mineral production land
* Vegetable farmland
* Recreational land
Residential and Commercial Land Investments
Residential and commercial land development offers a feasible entryway into investment, because virtually an unlimited number of land development opportunities can be structured to meet an investor’s capital and time constraints. For most small investors, Real Estate Investment Trust (REIT), Exchange Traded Funds (ETF) are an ideal choice because they do not require direct management, they are broadly diversified by property type, they are geographically diversified, they can be purchased or sold on a real-time basis, and they are very inexpensive. Some specialize in a type of real estate, but others, such as the Vanguard REIT ETF (VNQ), provide diversified exposure to industrial, office, retail, health care, public storage, and residential property developments.
Unfortunately, these types of investments negate the ability for the landowner to enjoy using the land. Therefore, residential and commercial land developments are not feasible options for people that want to truly experience the feeling of land ownership.
Issues to Consider
Once the decision has been made to purchase raw land as an investment or for development, investors need to understand many issues about the legalities associated with the use of specific parcels of property. For example, land-use restrictions may curtail the manner in which the land can be used by the owner, land easements may grant access to a portion of the property to an unrelated party, and the conveyance of mineral rights may grant an unrelated party the authorization to extract and sell minerals for financial gain.
In addition, riparian and littoral rights may stipulate the access that the landowner has to adjacent waterways, and the lay of the land may dictate if it lies in a flood plain, which would greatly impact the manner in which the land could be utilized. Fortunately, prospective land buyers can get answers to these questions by reviewing the legal specification for a parcel of land, which is found in a document known as a land deed. This type of document is typically available to the public via the internet, or it can be obtained the old-fashioned way, by visiting the land records and deeds division of the appropriate county clerk’s office.
In addition to legal issues, small investors should consider the land’s access to basic utilities such as electricity or telecommunications. Investors should also review the land’s annual property-tax obligation, assess the potential for trespassing violations and analyze the remoteness of the land from the landowner, as well as from the nearest community. All of these issues are important, because the lack of utilities may greatly hinder the ability to utilize the land, the land’s remoteness may impact the opportunities a landowner has to enjoy the property, and property taxes may impact the land owner’s finances. With these issues in mind, prospective landowners should undertake a comprehensive due-diligence assessment before deciding to purchase land.
Buying raw land is a risky investment because it may not generate any income and may not generate a capital gain when sold. It is recommended that most small investors with a yearning to own land should utilize the wide variety of ETFs and Exchange Traded Notes (ETN) which are now making available to small investors opportunities that were once only available to hedge funds. By utilizing these types of investment products, investors should be able to fulfill their desire for land-related recreational activities while generating a reasonable return on investment over time.
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