If you’ve ever thought about investing in real estate, you’ve probably considered residential, commercial multifamily, offices, hotels, or even industrial properties.
But what about land with no property built on it?
Although land is becoming more and more scarce, there are still multiple options when it comes to investing in land property.
In this article, we’ll look at what types of land properties exist, explain why they present quality investments, examine financing options, and talk about where you can start looking to purchase land.
Let’s dive in!
There are 3 types of land property we can look at to understand how they operate and their investment potential.
In developed and developing cities and towns, space and property values are ever-increasing. In these areas, parking lots prove to be a profitable investment. Many investors are interested in them over traditional forms of real estate.
Parking lots generate revenue flow through their use.
In premium locations (downtown sectors and highly populated areas), parking lot owners charge for their use.
These properties can exist in a few different forms, from surface-level parking lots to multilevel garages.
While unassuming at first glance, parking lot properties have a low cost of entry, and they present a great ROI for minimal work.
Vacant land is simply an empty space with no real future intentions placed upon it.
These plots of land are very difficult to find in urban and developed areas, but they are often more readily available in less developed, rural locations.
This type of property is a blank slate for whatever the investor chooses.
It could be rented out and maintained for open space, outdoor events, it could be used to harvest natural resources, or even used for farming.
Despite being the type of land property with the lowest immediate cash flow generation, vacant land accrues value immensely.
Keep it well-maintained, and it will prove to be a great investment over time.
You must ask yourself one big question before you plan to purchase vacant land properties: why is the land vacant?
Is the previous owner simply selling the land and moving on to another investment?
Or is the land difficult to manage?
Is there no market for open land where you are planning to purchase it?
Your answer will reveal any red flags about the property and ultimately let you decide if that specific plot of vacant land is a good investment.
Land for Construction
Land properties for construction are open plots of land that plan to be utilized for property and real estate development (residential or commercial).
Like other land property investments, investors should look toward rural areas for available land to purchase.
However, good deals on land used for development in cities can present a profitable investment. Additionally, land for construction presents a wide range of use cases, and it’s often cheaper than buying already-established property.
Compared to all land property, land for construction also presents the highest potential gains for investors.
A good marketing strategy will let you, as an investor, attract customers who want to build on the property. Deals can easily amount to millions of dollars, depending on the size of the land and the ease of development.
Keep in mind, however, that the barrier to entry for these properties tends to be the highest of all land properties. Preparing land for construction also takes work like grading, zoning, These processes cost money.
Why Invest in Land Property
Land properties are fantastic investment opportunities, given a proper understanding of market demand in a given area. On a macro level, a stronger economy means land will accrue more value.
Here are some reasons you should consider investing in land properties:
Low maintenance and appreciation
Unlike commercial or residential properties, land property requires very little maintenance. The most you’re required to do as a landlord is make sure the property is clean and suitable for its purpose.
With proper maintenance and an economy that supports demand, land properties have the potential to greatly appreciate over many years, sometimes more so than other types of property.
This is even more true when considering property meant for construction.
Big buyers looking to expand a business or build real estate will often pay premiums to be able to utilize the land, which gives you significant revenue flow.
Scarcity of available properties
Available property is becoming harder and harder to come by.
As time goes on—and as development projects use land in both urban and rural areas—land will become more expensive. That means investing now is a good move!
Easy entry for property investment
Out of all types of property, land property is often one of the most accessible for beginning investors.
Land properties usually cost a fraction of residential or commercial properties, unless the land is located in a highly-populated area where demand drives prices.
This inexpensive quality makes land property attractive, especially for those with limited financing options or capital.
Financing Options for Land Properties
It’s perfectly fine if you lack the necessary capital and still wish to invest in land properties—many financing options exist to help you!
Here are some financing options that you can consider when purchasing your land property.
Conventional Bank Loans
When issuing conventional bank loans, banks check eligibility with your credit score and history. Having a portfolio of your owned properties helps to secure this type of loan; however, it isn’t necessary and these conventional loans are typically available to most investors.
With these loans, you’ll find amortization periods between 10-30 years. Banks will cover a very large amount of the cost of the property, sometimes 100%, depending on your credit score and the price of the property.
You still need to be aware of the amount of money you need to contribute for a down payment to acquire a conventional loan.
This can be anywhere from 20-50% of the property’s value. Every bank will be different and there may be some ability to negotiate. Loanbase helps you compare lenders and rates side by side to find the best lender that suits your individual needs.
Land loans are a form of mortgage where the only collateral is the land itself, as opposed to residential mortgages where the property on top of the land is included in the collateral.
While they typically have the same amortization periods and loan amount percentages of conventional loans, land loans typically require much higher down payments.
Because of the lack of collateral, higher down payments secure sales and reduce risk for the bank or lender.
Although they come with higher down payments, remember that land is usually nowhere near as expensive as resident property—higher down payments shouldn’t dissuade you from considering these loans as a great financing option for land property.
These loans are perfect financing options for land for construction or development purposes.
You’ll be eligible for these loans when you purchase property and plan on building residential property on the land. They don’t typically require many qualifications, which makes them pretty accessible.
Certain types of construction mortgages don’t limit the property being built to residential property. However, these loans are often difficult to acquire and not readily available from many lenders, at least not without well-established credit history or property portfolio.
Instead of giving you the loan in a single payment, construction mortgages provide them at certain building milestones. For example, purchasing the land would be the first milestone.
These loans usually finance up to 65% of the land’s value for that first milestone, and you need to accomplish building goals in set timeframes to be eligible for the entire value of the loan.
Amortization periods and interest rates vary greatly from provider to provider. Visit Loanbase to discover what construction loans are a good fit for your needs!
Where to Buy Land Properties
Land properties are very sensitive to location, and real estate location will heavily influence their price and availability.
The type of land property you’re planning to invest in will influence where you should look to buy them. For example, parking lot properties will have a much higher demand in busy cities and city sectors with some attraction to them that will drive demand.
You’ll also be paying more for these land properties where demand is high and there’s a competition to buy, so keep that in mind.
In general, land properties will be much cheaper in rural areas, where demand is low and there’s plenty of it available to buy. If you plan on your land’s value accruing over a very long period, and you have no immediate plans to build on it, rural areas are perfect areas to shop around for.
If you plan to invest in land for development, do some research on how development is spreading from cities to rural areas. If you notice trends in expansion, it’s an amazing idea to purchase land in areas that you think will be on the radar of big companies looking to expand in the future.
Most land properties don’t have immediate revenue flow—are they really good investments?
Land properties are amazing investments, but you need to understand how the property you’re going to purpose will generate you money.
Parking lots will generate a cash flow through their use, making them attractive options if you’re looking for an immediate stream of revenue.
Vacant land accrues value over time.
In a strong economy, their value will increase immensely over time.
The same goes for land for construction: while they can be expensive to invest in, not only do they appreciate, but finding tenants who wish to build on them will also generate a lot of income!
What are warning signs to look for when evaluating land property?
Look for reasons why land is on the market in the first place.
We’ve stressed how scarce land will be in the future, so ask yourself why the previous owner is selling it.
Do your research: maybe they’re just looking for immediate capital.
There are also reasons to stay away from certain properties.
Sometimes the land is not suitable for growing or building on, or maybe the demand in the area is not suitable for profit appreciation or construction use.
Just because a property is being sold at an alluring price does not mean you should invest in it.
Land properties are supposedly low maintenance. As an investor, what do I need to do to maintain the value of my land?
Because of the lack of property on the land, you only need to make sure the conditions of the physical land are up to code. You also need to keep your property clean and attractive to potential consumers.
Depending on the land you buy, you’ll find there are different aspects of the land you need to maintain.
Parking lots should have undamaged pavement, clean parking spaces, and curbs created to attract their use. For vacant properties, check the soil and ground for groundwater build-up and structural integrity. Make sure your permits are in order.
While all of these things cost money, after you finish these tasks there’s very little maintenance required for most land properties.
The main thing: keep your property clean and make sure it’s suitable for your needs.
With their low barriers to entry, and affordable prices in rural settings, land properties are great long-term investments for potential property owners.
If you want to invest in these properties, LoanBase can help!
We connect lenders and brokers through our easy-to-navigate platform, and we take all the headaches out of commercial real estate transactions.
Visit LoanBase today to learn more about how we modernize the commercial real estate industry, and to get a head start in your land property investments!