7 Questions to Ask Yourself Before Investing in Raw Land
By Michelle Clardie on 02/22/2024.
Reviewed by Dan Gatsby.
Investing in raw land can be highly lucrative. By adding value to the land, you can force appreciation. By leasing out the land or building rentable units, you can create passive rental income.
There is so much potential in a plot of raw land. It can be farmed, developed, or simply held for resale.
But with all this flexibility comes lots of room for mistakes. And many investors underestimate the risk because raw land is so affordable compared to developed land.
That’s why we chose to write this article; we wanted to make sure raw land investors, especially those who are new to this type of investing, understand which considerations are critical for successful land deals.
7 Questions to Ask Yourself Before Investing in Raw Land
Before you invest in raw land, make sure you have comprehensive answers to each of these questions.
1. What is Your Plan for the Property?
There are many options for using raw land, including:
Agriculture,
Mining,
Mobile home plots,
Camping and recreation,
Burial plots,
Developing for residential, commercial, or industrial use, and
Holding for future resale.
You might start with a plan, then look for a suitable piece of land. Or, you might find a great piece of land, and then try to decide what to do with it. Whichever way you approach this raw land investment, you’ll need to consider factors like:
Subdividing. Can the property be subdivided? Would it make sense to do so? Perhaps you could buy a large area of land and subdivide that land into individual parcels for sale to individual developers.
Development. Can the land be developed? Should it be? Do you have the knowledge and skill to handle a development on your own or will you need to hire a developer?
Timeframe. How long do you plan to hold the property before selling it off? Even before acquiring the property, you want to have an exit strategy.
2. Does the Zoning Match Your Plan?
Zoning laws dictate what you can and cannot do with your land. For example, you cannot build an industrial warehouse on land that is zoned for residential use. So you need to confirm that the zoning matches your plan before purchasing raw land.
Having said that, it is possible to get the zoning changed in some cases. However, zoning changes require approval from the authorities and can take years (if they are approved at all). If your plan requires getting the zoning changed, have a strong backup plan, or find a new plan altogether.
3. Will the Soil Support Your Intended Use?
The quality and composition of the soil are crucial. This is especially true for agricultural uses in which factors like soil fertility, drainage, and the presence of contaminants can significantly impact your ability to grow. But this is also true of land that you wish to develop on. The integrity of the soil determines how easily you can construct buildings on the land. It’s generally a good idea to have soil samples tested before purchasing a plot of raw land.
There are also ecological preservation factors to consider. In an effort to keep local ecosystems strong, many local governments have protections against developing certain areas of land. See if there are any land use restrictions in place for your intended land purchase before proceeding.
4. How Accessible Is the Property?
Accessibility is key in determining the value and usability of raw land. Consider how easy it is to reach the property via public roads. How far is the property from the nearest services like grocery stores and gas stations? Will this area be in demand by your intended renters or buyers? Accessibility affects not only the development potential but also the resale value of the land. If you intend for the property to be developed, you may need to consider building private streets to connect with the nearest public roads.
Similarly, does anyone else have access or need access to the property? For example, the land you’re considering may come with an easement, which would grant access to a third party for a specific purpose (such as a utility easement, which allows power lines to be erected and serviced).
5. Are Utilities Available?
The availability of utilities like water, electricity, gas, and sewage is essential, especially for residential or commercial development. If the property doesn’t currently have access to these utilities, how difficult would it be to bring them to the site? Would the expense be justifiable? And can you afford it?
This factor can significantly impact your budget and project timeline. In many cases, developers are at the mercy of the local government and utility companies when infrastructure needs to be extended to a new area of land.
6. How Will You Finance the Property?
Raw land loans are different from traditional property loans. They often come with higher interest rates and larger down payment requirements. This is because raw land often doesn’t have the capacity to produce immediate rental income as developed properties do.
It’s also important to note that you will have holding costs, even if the property is purchased with cash. And even if you are not developing the land. Property taxes, for example, will be due even if the land is not generating any income. And, carrying insurance is typically advisable, if not required.
Explore various financing options, including local banks, credit unions, and specialized lenders. Make sure you can qualify for the loan amount you would need. And see if the interest rate and loan terms negatively impact the financial feasibility of your project.
7. Is This the Best Use of Your Investment Funds?
How much do you stand to earn from your land investment? And can you get a better return elsewhere?
With raw land being such a flexible investment category, returns can vary dramatically from one deal to the next. For example, by developing the land, you can force appreciation and see impressive returns. However, this requires specialized knowledge and skill. Leasing vacant land to a local farmer requires very little day-to-day management, but the returns may be much lower.
Do you have the skills, knowledge, and experience needed to maximize your returns on your chosen land deals? And how do your projected returns compare to other investment opportunities?
How to Maximize Return Potential While Minimizing Time, Effort, and Risk
Many investors want the benefits of investing in raw land. But the specialized knowledge required for development, and the unique risks of investing in raw land, prevent them from making their move.
Luckily, with modern real estate investment models, like crowdfunding and syndication, you can invest in raw land with the support of a team of professionals. Crowdfunding and syndication pool funds from multiple investors to finance a real estate project. This allows individual investors to access unique land deals with low minimum investment amounts and high yield potential. And, because these deals are professionally managed by a real estate sponsor, you don’t have to invest your own time or energy in the project. Plus, you get to leverage the experience of the sponsor, which helps minimize any risk, even if you have zero experience!
