Common Real Estate Land Investing Mistakes
Want to take advantage of massive possible value appreciation through a hassle-free real estate investment?
Look no further than investing in raw land.
But beware of the common mistakes real estate investors make when buying land.
Guide to the video
- Land investing isn't as simple as it looks and simple mistakes can be the difference between wealth and expense
- Investing in land alleviates you of the tenant and management headaches typically associated with real estate investing
- Before you invest in a property, it's important to consider who might want to buy the land in the future, and how you'll exit the investment profitably
Video transcript follows
Land investing offers a hassle-free way for investors to take advantage of massive possible upside.
With no tenants, minimal maintenance or management requirements, and less competition in the investment space, value appreciation is the name of the game for land investors.
Not to mention, land is subject to economic scarcity – so they’re not making more of it.
But land investors need to think like real estate developers - insufficient due diligence before you buy the land can lead to serious problems.
Hey everyone – it’s Matt Marsh with Marsh & Partners.
Marsh & Partners is a development and national consulting firm that helps business owners and investors maximize their real estate and transform their businesses.
Today we’re going to talk about common land investing mistakes people make when buying land.
At Marsh & Partners, we’re bullish on land investing, not only for our own future real estate development projects, but as a buy and hold asset as well.
But here’s the thing.
Land investing isn’t as simple as it looks. Oftentimes, there are dangers and pitfalls that aren’t evident on the surface.
My goal today will be help you avoid some of those common land investing mistakes that really can be the difference between wealth and expense.
So, let’s dive right in.
Mistake 1. Failure to consider the path of growth
By the time dense development has already reached an area, it may be too late. The land’s much more expensive and the land entitlement process typically becomes more challenging.
Anticipating the path of growth and getting ahead of changing human migration patterns is an important aspect of land investing and capturing value appreciation.
Sometimes, the path of growth is very difficult to predict – disruptive technologies and pandemics may force people to live differently than they would have otherwise.
But cities undergo cycles. And as areas experience rapid growth, real estate prices rise, traffic increases, and the natural tendency is for growth to begin to push horizontally from urban cores.
That path of growth impacts land values and if you fail to consider it fully, you’ll likely leave money on the table.
Mistake 2: Failure to consider highest & best use
None of us have a magic 8-ball. Believe me, if I did, I’d own a whole lot more real estate than I do now.
I say that because anticipating a piece of land’s highest and best use can be a challenge.
If you buy land as an investment, the goal is to capitalize on the value appreciation because of it being more valuable in the future than it is today.
But what drives that property valuation and how do you quantify it?
What types of developers or investors will be interested in the property in 3, 5, or 10 years?
Does the local government exert strong control over land-use that could impact the future value of the property?
They are all important questions to consider, and they all relate to a property’s highest and best use.
Your ability to quantify those factors will increase your likelihood of a successful land purchase.
Mistake 3: Inadequate due diligence
Before you buy a piece of land, there is a substantial amount of due diligence that’s required to make sure you’re not buying something that ends up being worthless.
Vacant land is often subject to easements and covenants that restrict what, where, and how much can be built on a property.
Additionally, a piece of land can suffer from environmental issues, even from adjacent properties, or may sit in a watershed or flood zone that could greatly impact its value.
Delineated wetlands will also impact the allowable buildable area on a property and will adversely affect its value.
These are simply a couple of a long list of items you need to consider before investing in a piece of land.
If you’re interested, reach out and ask us about our comprehensive land due diligence checklist to help on your next acquisition.
Mistake 4: Failure to think about land like a real estate developer
Most real estate developers are primarily concerned with what a piece of land can yield them. How dense and what types of allowed uses can they build?
Municipal regulations govern much of what can be done on an individual property – everything from zoning and stormwater regulations to property setbacks, allowable impervious surface requirements, right-of-way improvements, off-site improvements.
All these considerations usually rear themselves as dollar signs on a development proforma so they’re important to investigate.
A property’s terrain and topography directly relate to the amount of grading and sitework a developer would need to contend with on a property.
Access to public utilities, or a perc test and the composition of soils on a site are considerations a developer would also be concerned with.
So, if your goal when investing in land is to ultimately sell it to a developer or develop the property yourself, you need to consider how a developer will assess and value the property.
Mistake 5: Failure to consider several exit strategies
Failing to consider several exit opportunities before you buy a piece of land is likely the biggest mistake land investors make.
Land investing can be highly speculative and often doesn’t generate any positive cash flow unless you structure some sort of land lease.
The way in which you structure a land contract plays a large role in affording yourself the agility to pivot if need be.
But consider this for a second. A piece of entitled land is worth much more to a developer than simply raw land. An early exit option could be to fully entitle the property, with a minimal capital investment, and sell the land to a real estate developer or building without having to take the project full cycle.
You’d capture some upside appreciation in the value of the property, but wouldn’t have to go through the entire real estate development process.
So, before you buy a piece of land, make sure you’ve considered several exit strategies you can employ at various stages of the investment cycle.
Check out the video description for more on this.
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