06 Aug Real Estate Investing Q&A: Should I Invest in Land?
“Hi Billy… How do you determine whether a piece of land is worth the asking price? For instance, 2 acres that could possibly be subdivided 3 ways selling for $200,000 in an area where the median income is about $36,000, and is in a great upmarket holiday accommodation area? Your advice on the 1.5% of buying price rental has made it easy to weed out emotional purchases, and now it’s time to do the same for land. Thanks so much for sharing your pearls with us.”
Several years ago, I was partner of a company and during my time there we purchased 18 lots that were fully developed (all utilities and streets put in). The owner was unloading them. He wanted out. We knew what kind of house would sell in that area and what the price point would be. We knew that the homes would sell for 50 times the cost of the land. I know if you are an experienced investor or builder that seems absurd, but it’s a true story! The typical range is:
A house would sell for 5 times the cost of a lot. So one way to determine the value of land is what would be the selling price of a home, if you were to develop it into lots. Then the development costs must include purchase price and all land improvement, utility taps, carrying costs, and any rezoning and re-platting costs. If an opportunity is simpler than this, then that makes it even easier to consider. When I am investing in land I like to see a minimum of 7 to 10 times house value to cost of the lot.
Some other things to consider are:
Vacant land has no income stream but it does have ongoing costs. Any time you buy raw ground you have ongoing cost (taxes, etc) with no income. In some agricultural states investors will buy raw ground and graze cattle on it. By doing so they receive from income from the cattle lease and the taxes come under a “agriculture exemption” and are greatly reduced.
By changing the “use” of raw land you can increase its value. This is the favorite and most used method of investors. Changing the use is typically done through rezoning and re-platting the land. Sometimes just a rezone on a property can increase its value greatly. In more rural communities where rezoning and re-platting are not required, simply subdividing the ground into lots or smaller plots will greatly increase its value.
Vacation markets are more dependent on the national or regional economy than they are the local economy. The last thing to remember is, vacation markets can be especially cyclical. If the national economy is doing well then those markets have a tendency to thrive. If it is not doing well, then they suffer.
Every so often I receive a real estate question that I feel would be beneficial to answer publicly. So feel free to leave your real estate questions in the comment section! Chances are if you are wondering about it, someone else is too.
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