Last Updated on September 12, 2023 by
Your family and friends have probably advised you to invest in land. While it’s true that land is the best investment, you should consider learning more about this venture. You should take your time to understand more about the practicalities of buying and owning land as well as managing a land-based venture.
You should also understand the risks and potential profits of owning land. This means taking your time to understand the market before investing in land.
Below are essential things you should know before investing in the land:
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1. Know What You’re Looking For
Most people say that real estate properties often appreciate in value. However, buying undeveloped land isn’t the same as purchasing a townhouse. This involves purchasing raw, unused, or underdeveloped land.
Most people think that investing in land involves buying an out-of-town piece of land then holding on to it until it appreciates in value. Unfortunately, the process isn’t always this simple. There are things you should look out for when looking for raw land for purchase. These include:
- How accessible is the land to your city
- Is there a reliable water source
- How solid is the ground, and can it accommodate a building
- Is the piece of land near a major road
- Are there any zoning rules that you should consider
Most investors purchase raw land with development plans. No matter how cheap the land is, think twice. Don’t forget to ask the questions that matter.
You should start by getting a report of the land’s soil, topography, and drainage. These reports help you know exactly what you’re investing in.
Then, schedule a day to visit the land. Most investors are pretty busy, and they often skip this step. Don’t be satisfied with a few satellite images of the land; go there in person to see what you’re spending your money on.
2. Getting a Land Loan Isn’t Easy
Keep in mind that purchasing raw land is more complicated than buying a house. The logic here is quite simple. The land will not be the buyer’s primary residence; hence, it’s very easy for the owner to walk away if they face any financial setbacks.
Some lenders require a 20% to 50% down payment before approving you for a loan. Likewise, the interest rate on land loans is also higher. This is why land investment is a better option for people with many liquid assets who don’t mind tying up their money in an investment for an undetermined amount of time.
3. You Have to Plan for Turnaround Time
Raw land investment is similar to any other real estate investment. This means that for it to pay off, you need to plan how long you will wait until you sell it.
For example, if you purchased land around the 1970s, it will have increased in value, and you can enjoy a sizable profit despite the numerous fluctuations in the market. But if you bought land before the 2007 housing bubble burst, you could be looking at a loss if you want to sell today.
After purchasing the land, you need to plan what you will do with it quickly. Typically there are three primary options for landowners. These options include:
- Divide the land and resell to other investors
- Develop it yourself and build a home for yourself or for resale
- Leave the land without developing anything until it increases in value
Whatever you choose, making any money from a land investment largely depends on it increasing in value to some degree after purchase. Ensure you plan everything before buying the land. If you consider investing in land then selling it later, go here for important land-selling tips.
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4. Always Be Prepared for Additional Expenses
Raw land also requires upkeep and maintenance. Even if you’re not thinking about developing it and want to leave the land untouched until it increases in value, remember to account for the cost of upkeep.
The land will require mowing, the grass should be cut, and the fences tended to. Whether you will do all this yourself or hire someone else to handle it, you will still incur additional costs.
5. Consider the Taxes
Taxes are among the biggest hindrances to land investors. Unless you plan to buy the land then turn it into a commercial enterprise or a full-time business, taxes will strain your plan to invest in raw land. But you will still need to pay self-employment or small business tax even when you turn your land into a business.
Unfortunately, the government requires all landowners to pay property tax even when they’re not making any money from the property. Additionally, you will need to dedicate a large percentage of your proceeds to the IRS if you choose to sell the property.
Fortunately, you may be eligible for tax deductions that will make the issue easier to handle. But you should ensure you meet all the requirements to qualify for the deductions.
6. You Could Be Sued for Injuries
Did you know that someone could sue you for injuries or the death of a loved one if it happened on your property? It’s easy for anyone to sue you, depending on the location of your property. The best way to reduce this risk is by placing “No Trespassing” signs all over the property.
Additionally, you should also ensure that there are no obstacles or dangerous items on your property that could threaten the life of another person. Take all measures to repair all the damages on your property to reduce the risk of a lawsuit.
Now You Know What to Look Out for When Investing in Land
Are you considering investing in land? This is one of the most significant investments you can make due to the scarcity of land. However, you should be aware of all the pitfalls and risks involved in land ownership.
You should do your homework well and take advantage of any low property prices to purchase your land. Knowing what you’re getting yourself into when investing in land will guide you to handle any challenges.
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