While it may not be the most glamorous real estate investment, buying raw land can be a good investment -- if you understand how to invest in land properly. Land investments can produce high returns, passive income, and large profit margins.
But like other types of investments, investing in land profitably comes down to thorough due diligence. Let's dive in to how to invest in land, why you might want to, and important things to know before you buy vacant land.
What is raw land?
There are three types of real estate investments -- commercial property, residential property, and land. Vacant or raw land is a plot of land without any established buildings or equipment that can be used for the development of commercial or residential real estate or for farmland, ranches, or natural resources such as mineral, water, or air rights.
In essence, when you invest in land, you are buying untouched, raw land, that has not been developed. The zoning of raw land is very important because it determines how the land can be used for future development. There are eight main categories of land use:
- Public or semi-public (like a library, public school, or bus station -- also called institutional use)
- Parks and open space
- Agriculture (which can include farmland or forestry)
- Right of way (which is an easement that gives people access to their property through another piece of land or parcel)
There are several subcategories within these eight main land-use types that determine what size the development that can be based on the area's density, or the type of property that can be built or not.
Why invest in land?
While not all land holds equal value, in general, there are a number of advantages to buying raw land.
Good return on investment
Like residential or commercial investing, land can produce passive income or large profits depending on how the land is purchased and sold. I have several colleagues who specialize in buying land and have done extremely well for themselves over the years. It's possible to make high-double-digit returns if you buy the right piece of land at the right price, and there are ways to earn residual passive income with vacant land.
The value of land varies depending on the location, type of land, and the amount of acreage being sold. Some raw land can cost hundreds of thousands of dollars to millions of dollars, while other vacant land can cost just a few thousand dollars. For most people, land can be a low-cost investment that doesn't require a bank loan to get started.
More land isn’t being made
Land, in general, is in demand. As our population grows, the need for land to develop grows with it. And there is only so much land available.
Little to no maintenance
Raw land is undeveloped, meaning there is no property to maintain or tenants to deal with. Aside from paying property taxes and keeping the land mowed or secured, it's a relatively low-maintenance investment.
Land investing faces less competition than residential and commercial real estate investing. So if you want to start a real estate business, land holds a lot of opportunities. While there are definitely other land investors out there, in general, there is more land than there is competition, which means you can find really good deals if you’re willing to do some extra homework.
Terms to know
Land investing involves a number of unique terms compared to other types of investing. Take a look at some of the most common terms in land investing.
Air rights: The space above the property or the Earth's surface. Owning air rights gives you the right to use, rent, or develop the space above the land without interference by others.
Ingress and Egress: A property owner's right to enter (ingress) and exit (egress) their property. Ingress and egress rights are especially important if a property owner doesn't have direct road access to their parcel.
Mineral rights: The use of land to develop or extract oil, gas, coal, metal ores, stones, sands, or salts.
Parcel of land: A tract or lot of land as defined by the county, city, or municipality
Subdividing: The process of dividing a parcel of land to develop each area independently of one another as a way to increase growth and maximize the use of space.
Water rights: Also referred to as littoral rights, meaning a body of water, such as a stream, spring, lake, river, gulf, or ocean attaches to the land. The owner of the land is able to use the area of water as long as it does not affect those upstream or downstream.
Zoning: The legal regulation appointed from the county or municipality dictating how a property can be used.
Zoning variance: A request to deviate from the current zone ordinance, giving the property owner a waiver that allows them to use the property outside of its current zoning regulations.
Ways to invest in land
Just as there are several ways to invest in residential or commercial property, there are multiple ways to invest in land. Below are some of the more common methods of buying and selling raw land.
Flipping land is one of the most popular methods of land investing and simply means you buy a parcel of land for a low price and sell it later for a higher price. Places like tax sales or foreclosure auctions can be great places to find low-cost land that can be flipped for good returns.
Flipping land can be as simple as buying low and selling high, but some of the largest profits can be made by getting the proper entitlements to the property to add marketability. Entitling could include doing the work to get the property zoned or re-zoned, cleared for development, subdivided, or permitted for builders. Doing this work adds value because it saves the prospective buyer time, cost, and risk since entitling is already done.
For example, a land investor buys a five-acre property for $15,000. The investor works with the county to subdivide the five acres into five separate parcels with one acre of land each. Now the investor can sell five separate parcels of land, which could be significantly more than re-selling the entire plot as one piece of land.
Developing raw land
Some investors buy land to develop it themselves. While this can be a profitable venture, it can also be a long and costly process. If you want to develop commercial or residential property, building from the ground up, buying raw land in a suitable location and zoning will inevitably be a part of the process.
Buy and hold
Some land investors will buy raw land with the intent to hold the land long term. They may want to develop the land in the future, want to wait for the demand to increase (thus increasing the value of the land), or want to hold their land rights, which could include water, air, or mineral rights. While the landowner holds the property, they are responsible for paying annual taxes and maintaining the property as required.
Buy and lease
If the goal of owning land is to create a passive income stream, which is residual income that is paid to the investor monthly -- the landowner can lease the land for a third party to use. For example, if the land investor owns 40 acres of farmland, rather than farming the land themselves, they can lease the land to a farmer. The farmer pays the landowner monthly rent and is responsible for the land development and maintenance of the land, including paying taxes.
Buy and sell with owner financing
Another option for creating a passive income stream when investing in land is by selling a parcel of land with owner financing. Owner financing is when the seller of the property carries financing for the buyer, essentially standing in for a bank. The buyer provides a down payment and repays the seller of the property the remaining balance of the loan according to specific terms. The buyer of the property is responsible for the land development and maintenance of the land, including paying taxes.
Where to find land for sale
Like other types of investments, online industry websites are a common way to find available land for sale. Websites like land.com, landflip.com, lotnetwork.com, or landwatch.com are popular ones, although there are dozens of nationwide online databases of land for sale, in addition to private websites created by land flippers.
Another great source for raw or vacant land is county tax sales. Property taxes are one ongoing expense that even land investors can't avoid. Sometimes, landowners let their taxes become delinquent, which can put the parcel of land up for public tax sale. This can be an excellent way to buy raw land for a relatively low price.
You can also find land for sale through direct marketing campaigns. As old school as it may seem, sending letters to potentially motivated landowners can be a very lucrative way to find off-market land for sale, and you can typically negotiate a discounted purchase price.
Things to know before investing in land
As I mentioned before, not all raw land is considered equal. Environmental factors play a huge role in the value of the property as a whole. When you evaluate a piece of land, you want to make sure the property can be developed or used for its intended purpose. If the parcel of land is considered swampland or near a cliff, it may be difficult or impossible to develop as desired.
And always conduct thorough due diligence on:
- the property’s zoning
- demand for that type of raw land in that area
- the land's current value or potential future value
- annual property taxes
- public access to the property or if ingress and egress rights are needed through a neighboring piece of land
- utilities -- if the parcel has infrastructure such as water, electricity, or septic or sewer, or it will need to be added
- potential restrictions for the area based on local zoning laws
Depending on the type of investment, it may be worthwhile to have a feasibility study done before buying a piece of land to determine if the intended development is feasible on that plot or in that location.
Even with proper due diligence, there is always a chance the land sells for less than expected, does not sell as anticipated, or has costly, timely, or unexpected expenses arise as it's developed.
There is no denying that land investments are a riskier investment, but they can be extremely profitable as well. This investment strategy can get complicated, and while there is opportunity in buying and selling land, there is also a lot to know. Determine if the risk is worth the reward and if this investment strategy fits your investment portfolio.
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