Benefits & Challenges of Investing in Land Real Estate

Most people think of real estate assets in terms of properties. However, bare land is also a real estate asset and a potentially lucrative one for investors, although it also has a few challenges. To this end, you should conduct thorough research to make informed decisions when investing in land real estate.

So, what does an investment in land real estate entail, and would it be ideal for you? Here is a brief overview of the benefits and challenges of investing in land real estate to give you an idea of what to expect in your venture.

Benefits of Investing in Land Real Estate

Investing in land real estate has many benefits. Overall, it is potentially profitable and considerably easier and simpler than investing in property. The most notable benefits include the following:

·         Low Capital Requirements

Buying bare land is relatively affordable because it doesn’t include the cost of property and other permanent structures. As such, it is a suitable investment option for cash-strapped investors. However, it is also worth noting that land prices vary depending on location. To this end, prime land situated in coveted locations may cost considerably more than land in low-demand locations.

·         Appreciation

Appreciation refers to the natural increase in land’s value over time. Essentially, the price of land increases as time goes by, usually driven by demand and supply market forces. To this end, you can make significant profits by buying, holding, and reselling land at a higher price after a few months or years. Notably, land appreciates faster and at a bigger margin when developed.

·         Low Maintenance Costs

Land requires minimal maintenance compared to property. Overall, maintenance is limited to fencing and landscaping. As such, you save time and money on regular repairs, renovations, and other property maintenance requirements.

·         Usage Versatility

Land is the most versatile real estate asset because it has many potential uses. For example, you can develop commercial, residential, or industrial property on it – interestingly, developing property from scratch on bare land is considerably cheaper than buying existing property. Alternatively, you can use it for other income-generating activities, such as agriculture, hosting open-air events, and more.

Challenges of Investing in Land Real Estate

However, investing in land real estate also has a few disadvantages, including the following:

·         Low Supply

Demand for land is high and perpetually growing. However, land is a finite resource with a limited supply that continually declines as the population and the resulting demand for property increase. To this end, finding suitable land for investing can be a challenge, especially in prime locations.

·         Illiquidity

Finding a suitable buyer for your land can take weeks, months, or even years, depending on factors such as location and demand levels. To this end, liquidating your investment can be a challenge, especially when you need quick cash.

·         Financing Limitations

Lenders prefer financing investments that generate regular income that can be used to repay the loan. Moreover, they prefer financing liquid assets that they can repossess and sell to quickly recoup their losses if the borrower defaults on payments.

However, land is an illiquid and long-term investment without a regular income flow. To this end, most lenders aren’t willing to finance land investments. Moreover, lenders that would be willing to finance your investment have strict requirements, including large down payment thresholds ranging from 30% to 50%.

·         Holding Costs

The holding costs of investing in land can add up to significant amounts over time, reducing your profits and potentially resulting in losses. Common holding costs include taxes, insurance, ongoing maintenance, and interest on loans.

·         Market Volatility

The value of land is subject to changes in economic conditions. For example, a downturn in the local economy can hurt the location’s appeal, reducing demand for land and thus lowering its value. Additionally, negative changes in the land’s condition, such as erosion and soil pollution, can also lower the land’s value and stunt its appreciation rate.

·         Zoning Laws

Zoning laws, development regulations, and environmental restrictions can be an obstacle when investing in land for the purpose of developing property. Notably, certain development restrictions can limit the land’s potential uses. For example, most cities restrict using land for agricultural activities.

Conclusion

Investing in land is a potentially profitable venture with other convenient benefits, such as usage versatility and low maintenance. However, it also has a few challenges. Overall, buying land in strategic locations can maximize your investment’s benefits while reducing and overcoming some of the risks and disadvantages.