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Ground Floor Investing – Buying Undeveloped Land
When managing tenants and keeping abreast of building maintenance is viewed as a hassle too much to bear, buying undeveloped land can look like a really attractive proposition for many investors. The concept can appear too simple to be true. Just buy a piece of land that is expected be at the center of major developments in the near future. Get in when people still do not realise the potential and cash out at 10 multiple times your investment.
The difficult part of investing in land is in identifying where the demand will go. Even the demographic of the population moving in can be a huge tipping factor. The beautiful part of this strategy is that as developments get underway, plans can change. And these changes can come in your favour. You only have to read the newspapers about changes in direction of major town planning or additional plans which were not included beforehand. This depends on luck.
As you are looking at the type of profits that can “force” you into early retirement, you are also looking at very big risks and disadvantages as well. Below are just 4 of them.
- Land is not depreciable. So you won’t be able to charge a depreciation expense to your accounts.
- You will need to put up a higher down payment for a lender to be comfortable enough to finance you. Doing so will tie up your money for a long time until you can exit properly. So you have to count in the opportunity costs associated with this.
- You will be continually repaying your mortgage without getting any cash inflow in return.
- Although you do not have to commit as much attention as you need to compared to a rental property, you still need to pay for basic upkeeping. And don’t forget the taxes as well as insurance.
Even with these drawbacks concerned with land investing, the prospect of a big payoff at the end of the day can be too tempting to ignore for many investors. Depending on zoning restrictions, investors are known to cut up large parcels of land and sell them separately to different buyers for different purposes. They basically buy the land at a low price, get the required zoning requirements and entitlements, and auction it off to interested parties. If you do decide to buy undeveloped land for investment, keep the following in mind.
Conduct extensive research
Either you will hit a home run, or you will end up with a lemon. This is reason enough to put time and energy into uncovering the information you need to make a calculated decision. Things that you want to find out include the types of companies that will enter the area, the demographics of the population who could be moving in, how long will it take for enough buildings to come up that adequately cater to demand, zoning details and even the possibility of downzoning, etc.
Work with numbers
If you are doing this for the first time, get acquainted with the hidden costs of land ownership. The best source of information would be from investors who had gone down this road before. Don’t depend on information from gurus and magazines. You need to find out for sure. The numbers you have to work out include what exactly is the loan-to-value you are required to cough out, related taxes you have to pay annually, the costs of liability insurance, opportunity costs, etc.
If you have decided to build your own building, you are entering a whole new ball game. It will no longer be just about staging and beautifying the place. You have to learn about sewer lines, easement areas, road building regulations, landscaping restrictions, electrical cabling, etc. Hiring professionals to help you is the best way to go. When contractors realise that you are new to this, they could be tempted to overcharge you. This is why you need to learn as much as possible regarding building your own building.
The gold is in the zoning
The value of any piece of land lies in it’s zoning. If you own the sky above it, you can theoretically charge aeroplanes for flying into it. But what if your original intention was to charge aeroplanes for using your airspace, but realise later that you do not have that zoning in your favour. That could very well be the end game for you. So never purchase any land without fully understanding what can be done on it and what cannot. The biggest contrast you might find would be the difference between industrial use and residential use. Getting this wrong can put all your plans at risk.