When I first became a Realtor and I was taking several courses to get my Broker’s license, I remember learning about vacant land investing. One of the things they taught was the old rule of thumb is to never invest in vacant land if you weren’t going to build on it within 12 months. Now I’m sure many people may disagree with this idea but I do believe there is some merit to this statement.
You see, I actually broke this rule about ten years ago so I learned the hard way of course. I had purchased a piece of land in a vacation home community in upstate Pennsylvania in the Pocono Mountains. When I began I was looking at a pretty underdeveloped area (which was what I wanted) that a few friends and family members of mine also vacationed. I had found the lot available in a local newspaper and when I met with the seller, I was eager to buy. The guy selling me the lot said it had “perked” (meaning it passed a percolation test) but I did another test to verify for myself and I made it part of our own purchase agreement. A percolation test is to determine the absorption rate of soil for a septic drain field or “leach field.” This is a detail that is EXTREMELY important because if it didn’t perk, it would be just an unbuildable lot.
After closing on the plot of land, here’s where I made my mistake, I didn’t build my house until 6 years later. I was just too busy to do it. Naturally I ended up paying thousands of dollars in taxes and homeowner’s association dues for six years with no real benefit except for a little fishing and a nice plot of land to look at. So that’s what can happen when you break rule #1 when investing in vacant land. But hey, we all make mistakes and it’s better to learn from them and teach than sit and wallow.
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Advantages of Buying Vacant Land
Plus there are plenty of advantages to buying land as well, like:
- Strategically buying and flipping the plot to another investor
- Having the ability to sell portions of land after subdividing. This can be more profitable than just flipping the whole vacant lot
- It can be a stable, long term conservative investment
- Land is a tangible investment that can be more affordable than say developed land as far as taxes and all around maintenance
- It can be developable for commercial or residential uses (e.g. investment property or build your own primary)
- Can use for agricultural or farming uses
I once worked at a Christmas tree farm in college where a builder was using the trees to pay his taxes on the land until he was ready to develop or subdivide the piece later on for residential homes. It was a great short-term operation he could set up quickly and efficiently that fit his plot of land. I also knew a commercial Real Estate attorney who used to work with a major pharmacy chain that were looking to expand into multiple areas across the tri-state region. His strategy was to go tie up a commercial lot in one of these places and then approach the company about putting a pharmacy at his location. He made a very nice living with this strategy, which was buying on research and knowledge, not speculation.
Disadvantages of Investing in Vacant Land
If you’re not buying with such a strategy in hand, there are some disadvantages to consider like:
- NO immediate cash flow
- Property taxes and/or association fees
- Survey’s, septic and wells can be expensive
- Vacant land can need maintenance and/or liability insurance.
- Vacant land can drop in value
- The area the lot is located could get worse
- Permits and approvals can become more difficult in the future as ordinances and future political changes occur
- Zoning restrictions
- Long term investing strategy that isn’t always liquid
- You can’t depreciate land
Now after discussing some of the pros and the cons, I hope this hasn’t left you scratching your head. Like mostly any Real Estate project, investing in land requires purpose, focus, and knowledge of what/where you’re buying. Buying on speculation is insanity to me. Know if you want to flip it, hold it, or keep it for yourself long before you buy it and never go in there without a “plan b.”
I’ve worked with several successful developers for many years, and they usually put larger land tracts under contract with many contingencies such as permit approvals for whatever it was they were trying to develop. So if they couldn’t get permits for what they were trying to build, they wouldn’t buy the land. If you do venture into vacant land investing just take into consideration the disadvantages stated above and try to mitigate the risks. Remember, the builder didn’t mind running a Christmas tree farm knowing he was going to have a huge profit once the land was finally developed!