How To Buy Land: Know What Questions To Ask Before Making Your First Investment
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If you are considering land for commercial use as part of your real estate investing approach, you’re on the right track.
Generally speaking, land (such as vacant lots and raw land for development) is an attractive investment. By developing a plot of land for commercial use, smart investors set themselves up with an appreciating asset that can serve as a long-lasting revenue stream. And if they have experience owning rental properties, the prospect of not dealing with structural repairs and managing tenants seems especially appealing.
Like many unfamiliar investments, the process of buying land can seem daunting. I know new investors can be put off by the apparent complexities, so let’s demystify the process.
For starters, you should be able to answer four key questions about the potential investment in land: why, where, how, and who.
The Why: End Use Dictates Location
When you are buying a home, location is everything. You look at the neighborhood, the schools, the nearby services. You wouldn’t think of moving your family into a new home that didn’t tick off most of your required boxes, would you?
You may think purchasing land for development or commercial use isn’t the same; however, location should always be one of the biggest factors in your land-buying decision, as well.
Just because you aren’t going to live there doesn’t mean you shouldn’t get a feel for the area. One of the biggest mistakes you could make is to simply evaluate the property without evaluating the surrounding area.
What do you plan to build on the land? Even if you plan to use the property as a long-term investment, location still matters. For example, building a flashy shopping complex in a run-down suburb might not be smart. Or if you intend to sell to a retail developer in a few years, they won’t be excited to buy if a competitor has already set up shop nearby.
Remember, the property itself can always be changed and improved. But improving the neighborhood and surrounding area is a completely different story! It is vital to keep in mind that you aren’t simply buying property, you are buying the location, too.
Here are a few things to consider:
- Business climate: Look at the surrounding businesses in the area. Is there a large number of competitors? Are the surrounding businesses showing healthy revenue?
- Economic climate: Is the area depressed? How likely is the location to attract other investors?
- Logistics: Amateurs talk about plans, experts talk logistics. Before putting their hard-earned capital into property, investors should think about a few things. How easy is it to get to the location? Can water, sewer, and other utilities be set up? These considerations must be taken into account in line with the purpose of the property, as well.
Once you've identified a potential property, be sure to ask a commercial real estate broker about the downside and benefits of your desired location.
The Where: More Than the Dirt Under Your Feet
Along with the location, the actual land itself is an issue to consider. What are you actually buying?
Here in the U.S., we have an established process for determining land quality: an environmental site assessment (ESA). Comprising four phases, an ESA ensures you don’t have any unwelcome surprises. Particularly if you are purchasing vacant land, you will want to be completely certain that the land can be developed according to your purposes.
In addition to an ESA, you need to check with the local utility companies (particularly if it is a vacant lot). Unless you’re prepared, setting up facilities to have electricity, water, or sewage is a headache you don’t want to deal with. Along with utilities, make sure to check that you have access and there is no need to get an easement across any other property.
The How: Upfront and Backend Costs
If you are considering buying commercial property, you are likely already familiar with managing the costs involved with investing. Nevertheless, even seasoned property investors can underestimate these expenses. That’s why finding the perfect investment property requires a careful cost analysis.
First of all, you need to understand that the actual costs are going to be much more than the price tag. Don’t be surprised by the higher interest rates from lenders (compared to traditional mortgages). Vacant land is considered by most lenders to be a riskier investment, so financing your investment can be expensive. One strategy to avoid this is to pay with as much cash as possible.
Along with expensive loans, the building and setup costs, legal fees, insurance, and service fees are part and parcel of the process. What costs will you face after the initial land purchase? Take note that getting insurance—in particular, liability insurance—can protect you if things go wrong, but it will add to your backend costs.
The Who: Local Codes and Other Laws
One way to look at law is as a set of obligations we owe to others. The question of legal compliance is then, “Who do I owe an obligation to?”
The obligation could be anything from a shared fence or driveway to an easement giving others access to the property. All of this should factor into your purchasing decision.
For a property purchase, one entity you will owe legal obligations to is the government. The government compels you to conform to its rules through zoning laws. Local zoning laws limit what you can do with your land. Is it zoned for residential or commercial use? Is it deemed agricultural land?
It is, for all practical purposes, impossible to change how the land is zoned. So, the best strategy is to find land that is zoned in line with your investment dreams. If you’re buying land with a specific development project in mind, do you have a commercial real estate developer you’d like to go with? Do they know the codes where you are buying? Which codes will you have to obey?
Besides governing what you can do with the land, zoning laws also can have tax implications, and property taxes, unfortunately, can be high. But if the land is deemed to be agricultural, then there are tax advantages. As such, investing in agricultural land has a distinct tax advantage, which could make investing in this type of land very attractive.
The Bottom Line
We’ve just scratched the surface, as there are many other questions to answer before making your first investment in land. You’ll need to research everything from permits to utilities. You’ll need to decide whether you’re handling the property search yourself or hiring a broker to manage the transaction. You’ll need to consider all expenses and not just the printed price tag of the real estate.
This is not at all to say that vacant or commercial property isn’t a good investment. It definitely can be! It just means it necessitates answering a few questions and carefully assessing your financial position.
But hey, anything worth doing is worth doing right, and buying land is absolutely worth doing—so do it right! Do your homework and the legwork, and you can set yourself up with a great investment.
By asking the right questions (why, where, how, and who) and having competent legal advice, you will avoid common mistakes and find yourself with an exciting new investment approach.
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