Is buying vacant land a good investment?
There is no doubt that purchasing vacant land can be a great investment. But as with any investment, it is not for everyone. Unlike many other investments, land pays no income, does not trade on any exchange and usually requires specialized knowledge to select a winner. But that doesn’t mean you should overlook it as an investment.
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In fact, some of the barriers that prevent people from investing help make land a great opportunity for others. Here are some of the main reasons why buying vacant land is a good investment, along with a quick look at the risks inherent in it.
Large tracts of land can cost millions of dollars, but on a relative basis, land is usually cheaper than many other investments. You will always pay more on a per square foot basis for developed property than for vacant land, and you will also have lower additional costs. When you buy land, for example, you don’t have to deal with utility costs, a mortgage, or property improvement and maintenance.
For most investors, an illiquid market is considered negative rather than positive. After all, if the original is illiquid, then it is difficult to sell it. However, this often opens up opportunities for knowledgeable investors. Since many investors are afraid of illiquid investments such as land, it can often be purchased at lower than market valuations. A smart investor who has an understanding of the potential for a plot increase in value can take advantage of illiquidity as it will drive away competitive offers.
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Although you may encounter zoning or other regulations if you choose to develop it, the restrictions placed on a vacant piece of land are usually little or no. Other than the paperwork required to transfer land title to your name, you generally will not have to file any additional forms with any regulatory authorities.
Unlike stocks, bonds, or mutual funds, land is a tangible asset. While you can bend over and touch the actual floor that you would have if you purchased a vacant lot, you will never be able to touch your actual mutual fund. Even a stock certificate is just a legal document indicating ownership and not an actual physical part of the company. When economic times get tough, investors tend to hold onto physical assets rather than financial assets, something that helps support the value of the land in the long run.
Low risk of damage or destruction
If you bought a vacant plot, you do not need to worry in terms of damages. Since your land does not contain any buildings, there is no danger of fire, property destruction, or “acts of God,” such as hurricanes. Certainly, vacant plots are not entirely without risk, as occupiers or vandals can dispose of or deface your property. But you don’t have to worry about destroying completed buildings on your vacant plot, which can cost you money, time and lost revenue, even if you have insurance.
One of the most famous observations about land as an investment is that they “no longer make anything of it”. Unlike homes, which are built by the thousands every year, all the vacant land in the world actually exists. Sure, some developed properties may be demolished and turned into lots, but with very limited exceptions, there will be no more “built-up” land for investors to buy. Although there is certainly plenty of land available, the fact that the supply of land is limited ultimately helps contribute to its value.
Although there are many reasons why buying vacant land is a good investment, it is not without risks either. Some of the main risks include the following.
It can be difficult to determine the value of land
Since the land is not traded on an active exchange, it can be difficult to obtain tangible value for it. Thus, it can be difficult to know if you are overpaying for it when you buy it, especially if you are not an expert in land appraisal. It can also be difficult to know a fair price to sell it.
The land does not generate any income
Unlike stocks, which can pay dividends, or rental properties, which generate monthly checks, land pays no income. If you don’t appreciate your land over time, you may never see a return on your investment.
It can be hard to sell
If another buyer never materializes a property that you want to sell at the price you want it to, you may never make a profit. Even under the best of conditions, it can take weeks or months to sell a desirable vacant plot of land.
Requires additional development cost
While the vacant land may appreciate everything on its own, one of its greatest benefits is the opportunity it provides for development. A luxury condominium built on a vacant lot, for example, may dramatically improve both the current and future value of your land — but it can also come at a significant cost. But if you have spent all of your investment money on the same land, you may not be in a position to improve your lot and make it more valuable.
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This article originally appeared on GOBankingRates.com: Is buying vacant land a good investment?
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