In a recent article (“Buying a Building to House Your Business? Stop and Consider This First”), I described a deal where I built a commercial building to house my business on a vacant lot behind one of my rentals. Eventually, after we moved out of the property, I kept it as a multi-unit rental, and I’ve had many businesses in there over the years.
My favorite part about this deal was that by building the commercial space, the property doubled in value, and the rent went up dramatically.
I’ve also purchased vacant land for other purposes. For example, I purchased land in the mountains of Northeast Pennsylvania with the goal of building an SFR rental, and I still own it today. This property now serves as my vacation home (and possibly soon my first venture into Airbnb short-term rentals), which I was able to acquire much more cheaply than if I had purchased it as developed land.
That said, investing in vacant land may not be right for every investor or every situation, and the deal’s success may also depend on the current market conditions.
How do you know if investing in vacant land is the right move for you?
Let’s take a look at some of the pros and cons.
1. Opportunity to Create the Highest and Best Use
One of the biggest benefits of buying vacant land is the freedom to create the property you want. Although it may require foresight, as you would need to determine what the best use of the property would be in your particular area, it also allows you to get creative.
Of course, many zoning restrictions are already set, so you would have to either adhere to them or go through the proper channels to have them changed.
2. Direct Ownership
Buyers of vacant land typically pay with cash, which would enable them to have full/direct ownership. Owning the land outright can bring peace of mind, especially since it’s a tangible asset that doesn’t wear out. Plus, you would avoid things like mortgage interest and loan origination fees typically charged by the bank.
Related: What Every Real Estate Investor Needs to Know about Land And The Cost of Development
3. Less Maintenance
Vacant land is much easier to manage remotely than rental properties are. Many of the maintenance concerns of a rental (i.e. plumbing, electrical, common areas, etc.) don’t apply to vacant land. There’s typically less vandalism as well.
4. More Affordable Than Developed Land
It’s usually cheaper to own as a long-term investment, especially since property taxes and fees are often lower than they are on developed land.
Also, sellers of vacant land are usually more motivated to sell, so you can get a lower price. You may even get seller financing. The affordability can be a game changer.
For example, when I purchased the vacant land for my vacation home, the land value went up in time between when I purchased it and when I developed it. I was able to use it as collateral for the construction loan, which I was eventually able to convert to a conventional mortgage without refinancing. When the project was completed, my total cost for the land and development was much lower than the retail value of the property.
If you’re thinking about investing in vacant land, there are a few potential downsides to consider as well.
1. More Difficult to Finance
It’s more challenging to get traditional financing to purchase vacant land. So, if you build on it and then the property doesn’t sell right away, your money is tied up in the deal while you wait. In that situation, it would be a long-term, illiquid investment.
2. Fewer Tax Advantages
Although you can still depreciate certain improvements, such as roads or a new sewer system, vacant land leaves you without any structures to depreciate.
You also wouldn’t have a mortgage tied to a structure, so you wouldn’t be eligible for a mortgage interest deduction.
3. No Cash Flow Right Away
Now, although you wouldn’t have a mortgage to make payments on, you would likely have other expenses, such as property taxes, the cost of improvements, and sometimes even association fees.
Without rental income coming in, you may need to get creative in order to cover the expenses. For example, you could sell parcels of the land or the rights to it (i.e. mineral rights, gaming rights, etc.), or you could find another use for the land in the meantime.
One winter when I was in college, I worked at a Christmas tree farm, where the owner was using the trees to pay for his property taxes until he was ready to develop or subdivide the land later on for residential homes.
4. Permits and Approvals Required
How the property is zoned locally (i.e. residential, commercial, etc.) can determine what you are able to do with the property as well. The timeline for getting your project approved by the township can also vary.
How many lots you’re allowed to develop is another big question, which dictates how much you can make through subdividing.
When I was in construction, I worked with builders who would include contingencies in their contracts, especially for larger land projects, and these often included permit approvals. If they were unable to acquire the permits for what they were trying to build, they wouldn’t buy the land.
5. Physical Issues with the Property Itself
Sometimes the property itself can have issues. For example, I would avoid flat lots due to water runoff issues. Likewise, with mountain property, steeply graded land is harder to build on. Also, I would need to be clear on the situation with septic, sewer, water, and road access.
Besides township restrictions and any issues with the property itself, the success of your deal can also be partially dictated by market conditions.
6. Impact of Market Conditions
Let’s say you didn’t build on the land, but you did improve it somehow post-purchase (i.e. subdividing, roads, sewer, etc.) and/or the area appreciated. You may still have a great deal on your hands.
If you purchase in a down market (i.e. buyer’s market) with the intention to build or improve the property and then sell, the big question is can you afford to hold the property while waiting for the market to turn around?
Market time depends on the area as well. I can’t stress enough how critical it is not only to do your due diligence but also to understand the development costs and the demand for and market value of your completed project.
I wouldn’t be against buying vacant land today, so long as I could do exactly what I wanted to with the property and was clear on my exit strategy.
As market conditions tighten and housing inventory is more scarce and more expensive, does it make sense for you to pivot and start looking at different options like investing in vacant land? As they say, land is the one thing they’re not making any more of!
What have been your experiences with land, good and bad? Is it something you’re looking at doing in the coming year?
Let’s chat in the comments section below!