I have been investing in real estate – both at The Investor's Edge and personally – for years. Some people are interested in investing in land so they asked: where are the best places to buy land for investment?
There are three strategies to invest in land: 1) buying improved lots; 2) buying large lots to subdivide and sell; and 3) buying lots to develop a property. New investors should focus on the first strategy, using direct-to-seller marketing to find sellers of land located on the edges of developed areas.
In the following article, I’ll dive into some more details about the best places to buy investment land. Specifically, I’ll cover each of the following topics:
- Land Investment Strategies
- Challenges with Investing in Land for Development
- Best Strategies for Investing in Land
- Places to Buy Land for Investment
- Final Thoughts
Land Investment Strategies
As stated above, three primary land investment strategies exist. These strategies make investing in land a whole other animal from single-family home investing. As such, prior to considering whether or not to invest in land, people should first understand these different ways how to actually invest in land.
- Option 1 – Improved lots: With this strategy, investors conduct direct-to-seller marketing to find improved lots for sale, that is, lots that already have connected utilities. With this strategy, buyers typically look to purchase a lot at a discount, hold it for approximately a year, and re-sell it for a gain.
- Option 2 – Subdivide lots: In this approach, investors buy large lots with zoning regulations that allow for subdivision. After purchase, these investors subdivide the lot into smaller parcels to sell to individuals looking to build homes. Ideally, the investor sells these smaller lots at a higher price per square foot than the large lot would command on its own, leading to a profit.
- Option 3 – Develop the land: With development, investors purchase a parcel with a vision for a future stabilized property. They buy the land, put together the plans and approval requirements to build on it, then actually finance and oversee its construction and occupancy as an income-producing property. Once stabilized, some developers choose to hold and manage the property, while others exit the deal by selling off the newly developed land.
Challenges with Investing in Land for Development
To put it mildly, development is an expensive sport. This strategy entails a tremendous amount of risk, and successfully developing a parcel of land requires significant experience in the development field. This makes qualifying for development-related commercial financing extremely challenging, as lenders want to see both finalized plans and a track record of success prior to lending.
As a result of the above, I don’t recommend land development for new investors. You assume significant risk, it costs a ton of money, and most lenders won’t actually approve loans for inexperienced developers.
And, with respect to the risk of development, investors initially assume total risk, that is, the potential to lose all of the cash they’ve invested into a project. Prior to approving a commercial development project, municipalities will want to see the completed plans. This means hiring – and paying – the following specialists (at a minimum):
- Architect
- Engineer
- Environmental consultant
- Real estate attorney
You will need to pay these individuals the soft costs related to a development plan – potentially tens or hundreds of thousands of dollars – prior to actually receiving municipal approval. Consequently, if you fail to receive final approval, you lose all of these funds.
Put simply, if you don’t already have experience as a developer, don’t consider this a realistic strategy for investing in land.
Best Strategies for Investing in Land
After outlining the above strategies, I recommend that new investors look to purchase improved land, that is, land with utilities already connected. More precisely, I suggest that these investors look for improved lots with motivated sellers (e.g. someone from out-of-state, a post-divorce situation, an estate-owned lot, etc).
Furthermore, these owners should have equity in the land. This means that they have something to gain in a sale. In other words, they want to sell but may not need to sell, and having equity in the land provides further financial motivation, as they’ll receive some cash in the sale.
But, how do I actually find these motivated sellers?
Great question! You’re not going to find them on the MLS. Instead, as I mentioned above, to connect with these folks, you’ll need to do some direct-to-seller marketing. To do this, I love using a database, and we’ve created our Investor’s Edge software for just this purpose.
This software includes a database of millions of properties. And, you can cross reference available-for-sale land with the actual equity in that land to identify motivated sellers. This creates a list integrated with tracking/marketing software to drive solid leads.
And, with these leads, I like to set a standard offer. Typically, I recommend offering 5 to 10% of the land’s tax-assessed value. For the motivated sellers outlined above, this may be a sufficient enough amount for them to say, yes, just please take this lot of my hands.
And, you don’t lose anything making these offers. If a seller doesn’t want to sell for that price, just move on to the next lead in your Investor’s Edge database.
Places to Buy Land for Investment
Now that I’ve discussed how to buy land, I want to cover where to buy land for investment.
For most individual investors, you’ll buy land “on the fringes,” that is, on the outskirts of developed areas. Purchasing parcels of land in business districts and city centers tends to be cost prohibitive. As such, commercial developers – not individual investors – tend to focus on these purchases.
In these outlying areas, investors have a higher likelihood of finding improved land parcels at decent price points. And, if done correctly, you can purchase land in the path of development. In other words, you want to identify the development trends in an area and, ideally, buy a discounted parcel that will appreciate in value as the area develops towards it.
Furthermore, investing in land has the inherent advantage that you can do it anywhere – in any state. With single-family properties, you’ll want to actually tour the home prior to purchasing – and need to be near it to supervise the rehab (unless you have an absolute rockstar team out-of-state somewhere). With land, you can have a real estate agent check out a parcel and facilitate a purchase for you anywhere in the country.
Final Thoughts
Full disclosure: I prefer buying single-family homes and other residential properties far more than investing in land. I just think these properties represent far superior investment opportunities, regardless of whether you choose to pursue a wholesaling or fix-and-flip approach.
Additionally, when you invest in land, you’ll typically need to sit on it for at least a year to realize any resale profit, and financing can be challenging.
Bottom line, if you want to invest in land, make sure you’re in it for the long haul. You’ll likely need to have enough cash on hand to purchase a lot outright, so make sure you’re comfortable tying up that cash long enough for the land to appreciate sufficiently to profit on the resale.
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