If the financial meltdown of 2008 taught investors that land isn’t necessarily a surefire asset, the market’s subsequent rebound shows that land continues to be a lucrative investment. By understanding your options and doing your homework, you can find a land investment ideal for your portfolio. Whether it’s an apartment building or an exchange-traded fund for wheat, a land investment can bolster your financial returns. Here are your options and how they work.
For more help with investing in land, consider working with a financial advisor.
Types of Land Investments
Investing in land isn’t a one-size-fits-all proposition. Investors with varying amounts of wealth and risk tolerance might gravitate toward a specific type of land investment. Use the following list to gauge which land investments appeal to you.
Commercial and Residential Land Investments
Commercial and residential properties have broad appeal because investors of all sizes can access them. For example, you might not be able to afford an apartment building, but you can purchase shares in a real estate investment trust (REIT) as you would purchase shares of a company’s stock.
REITs allow you to focus on one type of real estate, such as residential properties, or combine any number of types from every sector of land investments. That said, REITs are generally diversified whether you choose one or multiple types of real estate investments. In addition, as with investing in company stock, your investments can typically be as small or large as you like.
The downside of investing in REITs is that you won’t have any actual land to use or inhabit. Therefore, if owning your investment properties appeals to you, purchasing land may be a preferable route if you can afford it.
Livestock and Crop Farmland
Becoming a homesteader allows you to directly own your investment in a specific property. Living on and running your farm or ranch might be your dream come true – and the potential returns are icing on the cake. However, raising crops and livestock is expensive and risky. As a result, deep pockets and the ability to shoulder stress are all but necessary to manage this type of investment.
Crops and livestock are just the beginning of investing in agricultural land. For instance, you could cultivate an orchard, vineyard, mineral development land, timber farm or recreational land. Generally, these investments require less up-front capital than crops and also allow you to live on the land.
Specialized Agricultural Investments
On the other hand, if farming interests you but owning land doesn’t, exchange-traded notes (ETNs) and exchange-traded funds (ETFs) are a less costly way to get exposure to agricultural land. For example, the Teucrium Corn Fund provided a 35.1% return over the past year through investments in corn futures.
Like crops and livestock, you can purchase shares of ETFs and ETNs for specialized land if running your own timber operation seems overwhelming. Through these funds, you’ll have exposure to land rich in timber, oil and more and see healthy returns without owning an acre.
Tips for Investing In Land
If investing in land seems daunting, following these tips can help you make the most of your investments:
Understand Your Investment
Dotting each “i” and crossing each “t” can be irritating, but it’s usually worthwhile. Details like zoning laws, property lines, parking and whether an old apartment building has lead paint can make the difference between a profitable investment and a financial headache. Additionally, a title search can help ensure you would own the land outright with no disputes.
Research the Region
Every piece of land sits in a place where employment, household income and population interact and fluctuate. Ideally, the land you invest in will be located in a region on track to experience upticks in these crucial factors.
Follow Your Risk Tolerance
It’s recommended that investors don’t go against the grain of their preferences. If you’re risk averse, investing in areas with high population and income might be the solution. Buying land in a region with consistent demand and healthy economic activity can help offset the possibility of losing a fortune on a land investment.
Check the Water Waitlist
Some municipalities forbid new hookups to city water because of water shortages. For example, the city of Cambria in California hasn’t approved new water connections for two decades. As a result, reviewing your city’s water situation is critical before building new residential or commercial properties.
Verify the Tax Situation
Every municipality has different tax stipulations that can affect your investment’s profitability. For example, your city might charge income tax to residents and businesses. In addition, you might receive special tax breaks for using land in a specific way, such as farming.
Review Your Mineral Rights
As with taxes, mineral rights can vary based on region. For instance, your investment might grant ownership of the land you want but not what lies a few feet beneath the surface. This scenario could lead to legal mining or drilling by other parties with no financial benefits for you.
Play It Cool During Negotiations
When haggling over a desired piece of land, it’s recommended to leave your emotions at the door. Even if you’re excited about the deal, allowing emotions to lead the way can result in poor judgments and mistakes during negotiations.
Key Considerations When Investing in Land
Investing in land involves more than finding a plot and making an offer. Legal issues can render the most attractive land a lousy investment for reasons out of your control. For example, your municipality might tightly control how you can use the land in question, ruining plans for potential buildings or farms. Plus, part of the property might be legally accessible to your neighbors due to land easements.
Furthermore, bordering a body of moving or standing water can affect land accessibility and create floodplain conditions. As a result, it’s essential to review the land’s deed to understand the legal ramifications of ownership.
Once you’ve ruled out legal impingements, examine the land’s utility connections. Paying for new water or electrical lines can eat into investing profits significantly. In addition, proximity to towns and cities, the likelihood of attracting trespassers and how the land will impact your taxes are all vital to consider.
Is Investing In Land Right For You?
Several solid reasons might lead you to invest in land. First, you might aspire to own and operate a farm or vineyard and enjoy the financial returns as a side benefit. Or, as an investor looking to diversify their portfolio, you might invest in REITs with a proven track record. On the other hand, you might do your homework on a commercial or residential property and start collecting rent.
Investing in land might not be suitable for you if you don’t want to do extra research on your investments or take on more risk. While real estate in its many forms can be a lucrative investment, uninformed decisions generally result in losing money.
The Bottom Line
You can invest in land through residential and commercial property, farmland and specialized agricultural investments. In addition, you can invest by directly purchasing land or buying shares of REITs, which give you a diversified slice of the real estate market, spreading risk across numerous assets.
When investing in land, it’s recommended to research the relevant factors in your situation, such as tax obligations, title status and environmental implications. That said, the work is typically worth it and land can be a profitable asset for any investor.
- Land investments can be intimidating, especially if you’ve never purchased property other than your home. That’s where a financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While it would be great to be a real estate mogul, the reality is that most investors don’t have millions to throw at land. Not to worry – here’s how you can invest in real estate with little money.
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