Who
Should Invest in Vacant Land?
In this time of increasingly diminishing returns on many
traditional investments such as CD's and "blue chip"
stocks and bonds, many investors are looking at alternative
investment vehicles, which may offer the opportunity for
much higher yields.
As part of this process many investors might want to consider
investing in "pre-development" or "raw"
land as part of their portfolios.
Speculative Investing In Land
I am sure many readers have a friend or relative who bought
a piece of raw land for a relatively small amount, which
was sold some time later for an astonishing sum relative
to the purchase price. Be forewarned, however, raw land
investment is not for everyone. As with any investment that
has the potential to yield tremendous returns there is a
significant risk factor as well. The main qualities of the
successful land investor are patience and common sense and
a willingness to spend the time and effort necessary to
understand the risk / reward tradeoffs.
It is necessary at this point to differentiate between
an investor who purchases raw land with the intent of actively
pursuing its development and the investor who seeks to speculate
on the probability of an increase in value but takes no
active role in development and more or less "sits"
on the land anticipating a point where it makes sense to
sell.
This discussion will be addressed to the "speculative"
investor versus the "developer".
In the situations we are discussing it is assumed the investor
lives in an area where there are identifiable concentrations
of significant development but that there are also large
undeveloped tracts as well. It is also assumed that development
in these areas is reasonably dynamic and ongoing. Speculative
investments in land are based on the assumption that a demand
for this product exists and are much more difficult to justify
in economically stagnant areas. We will be directing our
attention toward the undeveloped areas slightly beyond the
centers of development. The timeline we are looking at is
approximately 3 to 7 years from purchase to development
(and potential sale of the property) being realized.
Evolution of "Value" or "They Ain't
Makin' Any More of It"
Although it seems a naive question to ask it is important
to understand the origin of "value" in discussing
what makes for a sensible raw land investment and what does
not. In other words how does a particular piece of land
become more valuable and how do you identify and understand
the forces at work in this process in order to invest wisely.
At the risk of over simplification the key is to understand
that the growth of urban development requires the creation
of "development land" to supply demand and that
there are several distinct phases to this process. "Development
Land" in this context is land that is located in the
path of growth and has the accessibility, zoning and infrastructure
of services necessary for development.
Value is created or "added" in this process by
the progression of the land through the stages of development
as a result of the efforts of developers who wish to sell
the land to users, municipalities who wish to accommodate
growth and generate tax revenues and ultimately users who
are seeking the best location to market their goods and
services. The astute speculative investor needs to be in
the path of this confluence of forces.
The Early Bird Gets the Worm
The bottom line for the speculative investor is to make
their purchase at a point in the land development cycle
where growth is close enough in both time and proximity
that a reasonable determination that it will be in the path
of development can be made but to purchase before prospective
users for the land have entered the market and caused to
values to accelerate.
In this land development cycle the most readily identifiable
area(s) to find good land investments are at the stage in
the development cycle where the municipal authorities have
identified the area(s) where they wish to direct growth
but at least several years before the municipal infrastructure
of services has been laid in. This type of property is often
found just over the City municipal service boundaries in
the County where urban (or suburban) and rural areas divide.
This information is easily obtained by a visit to your local
Planning and Zoning office. Most municipalities worth investing
in have some sort of "Master Plan" document(s)
for sale that specify the desired type and direction of
growth for intervals of 5 to 30 years. A polite inquiry
to a zoning official (who often spend a good deal of their
time making these plans) can also be the source of some
very good information about municipal attitudes toward growth
in particular areas and current time lines for development
of these areas.
Take these projected time lines with a grain of salt, however.
Municipal investment in infrastructure development is based
on available budget revenues. A second visit with the Municipal
Public Works Department to inquire about the projected access
to services in a particular speculative area will often
give a more concrete indication as to where near term monies
and development are targeted.
Assuming we have identified an area that has a reasonably
high likelihood of being developed at some point in the
next 3 to 7 years, we need to focus on specific properties
within that area.
What To Look For In Selecting Properties
1: Water and Sewer Access: A prospective development property
must have access to planned water and sewer lines. Also,
make sure the land will support a well and septic service.
If our best-laid plans go astray we still need to be able
to sell the property.
2: Soil types: Look for soil types with good drainage.
Your County Extension Service should have a book of County
soil maps available for reference and/or sale.
3: Obnoxious Neighboring Properties: Make sure the adjacent
properties aren't involved in some sort of continuous noise
or smoke (or smell) emitting quasi-industrial activity that
would make a prospective developer think twice about choosing
your parcel as a candidate for development.
4: Easements Across The Property: Does a neighboring landowner
have an easement across the property that would interfere
with development?
5: Prospective Zoning: There are often several different
Zoning Districts that the Master Plan(s) specify within
an area targeted for future development.
Summary
There is much more that could be said about investing
in speculative land. I hope the brief survey I have discussed
has been informative.
Investment in raw land can yield spectacular returns on
equity. You can also lose a bundle. The consistent winners
in speculative raw land investment are those who are comfortable
with the timelines involved, do their homework and stick
to the basics. For informed investors, speculative land
investments can be a useful, valuable and entertaining part
of a diversified portfolio.
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