Investors looking for creative ways to maximize returns in a competitive and highly desirable real estate market may be interested in purchasing vacant land, which has the potential to generate disproportionate returns when owned or improved.
âOne of my clients bought a vacant lot in downtown Atlanta in 2012 for $ 1,500 and was recently offered $ 80,000 in cash and decided to wait more,â said Bruce Allen, agent. real estate and lawyer for Re / MAX Town and Country in Atlanta.
But experts say the asset class is unique and requires the utmost care and diligence. Long term unpredictable market trends with few opportunities to earn income on vacant land make investing risky if not done right.
Have a shorter rather than a longer exit delay. Sitting on long-term land is risky because it could drop in value, says Michael Ross, vice president of asset and rights management at Rockspring Capital, a private equity firm specializing in real estate investing in Houston, San Antonio, Austin and Dallas.
âTime is our greatest risk,â he says; that’s why Rockspring’s release horizon is targeted at 18 to 36 months, from buy to resale once it’s ready for development.
Look for an income-generating use before development. If your goal is to develop the land, look for ways to make money while that process is underway, says Danny Mulcahy, director of equity for Northstar Commercial Partners, a commercial real estate company in Denver. Renting the land or using it for farming, self-storage, parking, or billboards can generate income during pre-development.
Get the right rights. Development readiness involves doing the work necessary to get the property zoned, cleared, subdivided, and / or licensed for builders, also known as rights, Ross says.
Granting rights can add value to the land and generate big returns, but only if you’ve secured the right rights for the market, says Russ Moroz, senior vice president of investment properties at Marcus & Millichap, a commercial real estate investment brokerage firm.
âObtaining the wrong rights can make the land practically worthless,â he says. “Or leave you in a worse position than selling the land without them, like accepting certain obligations with nearby landowners in order to get your rights.”
Due diligence is necessary. It’s a good idea to do a title search and buy title insurance, which protects the holder against financial loss due to defects in the title of a property, says Jordan Barkin, Realtor at Harry Norman Realtors in Atlanta.
If your goal is to build a single property, make sure the land is genuinely buildable and eligible for permits, says Matthew Briggs, managing director of Briggs Acquisitions, a private real estate investment firm. Check for any environmental restrictions or issues and planned zoning changes that could affect the property, he says.
You must understand the capabilities of utilities to manage the proposed development and how adjacent uses may affect your property. Look for past uses in case something was buried there or caused contamination, Mulcahy says.
Barkin also advises having a survey of the plot and a percolation test carried out by a licensed professional.
Buy in a high-growing place at the right time. The key to successful land investment and development is to buy where demand and growth are high, Ross says. If you don’t have individual knowledge of the areas to target, a third-party market analysis is a good idea, he says.
Buying land within 15 to 30 miles of major urban growth centers is a good benchmark, says Edward F. Del Beccaro, senior general manager of Transwestern in Walnut Creek, Calif.
Investors can consider tech cities like Seattle, San Francisco, Oakland, Denver, Austin, and Los Angeles, where economists project 10- and 20-year job growth horizons, or land within three blocks. major road interchanges, ports and public transport. Underused rather than vacant land in these areas can be a great way to generate profits while you work on the redevelopment, explains Del Beccaro.
Since plots of land and lots can shrink by 75% or more during a recession, buying land at the right time is essential to generate disproportionate returns, Allen explains.
âBuying land at the bottom of the market and selling during the takeover offers the best opportunity for high returns and lower costs of ownership,â he says. âBuying at the top often means having to go through a recession, which negatively impacts returns. “
Take your time. A land purchase takes careful thought and planning, so learn the ropes beforehand. Know your market on a granular level.
âThis is very specialized knowledge,â Ross explains of land investing, noting that land development investors have typically worked for builders or in real estate before.
âIt takes years of learning not to fall into all the bear traps that have been set,â says Ross.
âDon’t let anyone force you to buy anything,â adds Barkin. âDeadlines are important, but take the time to discuss your goals with your financial advisor. Don’t expect to “flip” the land overnight to make a profit.