Traditionally investors have always turned to the stock market for their returns. Whether that be stocks, mutual funds, or ETFs, the market provides an average annualized return greater than five to seven percent year after year. In the current market, one of the hottest markets is real estate investments, which offer a whole new level of creativity to investors. The purchase of vacant land is an area in which many investors are exploring for a variety of reasons.
There are certainly some success stories that have emerged from investing in vacant lots. For instance, one investor in Atlanta purchased a vacant lot in 2012 for $1,500 and was able to unload the lot earlier this year for $80,000. Despite the successes, many experts say investors should use caution when looking at vacant lots. Particularly, experts see them as risky and unpredictable due to their limited ability to earn income and withstand unstable market trends.
Looking specifically at some of the qualities of an investment in a vacant lot, it is easy to see why experts find it to be a harder sell. Experts recommend considering six major things when looking at a vacant lot investment. First, the investment timeline for a vacant lot is crucial. In the words of Michael Ross, Vice President of Asset Management and Entitlements for Rockspring Capital, “time is our greatest risk.” Sitting on land for three to five years is risky, as it could easily go down in value during that time period. Instead, Ross recommends an exit date no greater than 36 months out from the initial purchase date.
Secondly, experts recommend that the vacant lot is used for income before it is developed, if the opportunity exists. For instance, leasing the land or using it for agriculture, parking, or billboards can provide income while planning for development is underway. Third, investors should get the right to entitlements. By getting the right entitlements, investors are getting a head start on developing the land. The right entitlements include getting the property zoned, subdivided, and permitted. Beyond moving development further, the right entitlement can also add value to the land, while obtaining incorrect entitlements can lead to the land being almost worthless.
Fourth, experts recommend doing all required due diligence before investing in a vacant lot. Due diligence includes, but is not limited to, purchasing title insurance, making sure the lot is buildable, conducting a plot survey, and understanding the utility capabilities of the proposed development. Fifth, investors need to be knowledgeable of the location. As the saying goes, “Location, location, location”. A good benchmark is buying land within 30 miles of major urban growth areas and fast-growing cities across the United States.
Finally, and above all, experts simply recommend taking your time. Due diligence is, in itself, a long process, and requires careful consideration and planning. Developing a strong understanding of the market down to a granular level provides a great benefit to the investor. Knowing what to buy and when to buy it is a specialized knowledge that takes years of learning.