The raw land development process is often viewed as a complex investing strategy—one that only “experts” should consider taking on. While investing in undeveloped land is a complex strategy, beginners shouldn’t avoid it. In fact, I would argue that new investors can invest in raw land if they mind due diligence and are prepared for more work than what usually accompanies traditional exit strategies. If for nothing else, developing raw land simply comes with more steps.
There is no shortage of opportunity in the real estate industry as an investor. From investing in residential, multifamily and commercial properties, the real estate industry offers scores of options investors can pursue. One of the more under-utilized investment opportunities is raw land investing, and there is no reason to ignore it anymore.
Raw land development is the process of purchasing a parcel of land with the intent of either developing it and building on it, or holding onto it for long-term appreciation value. Raw land investing has an array of configurations, but will essentially provide a multitude of advantages from other types of investments; whether it be from selling the property, renting it out for passive income, or simply earning appreciation while performing little to no work.
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The fact of the matter remains: undeveloped real estate has the ability to deliver the same consistent cash flow as any other type of investment opportunity.
Fortunately for investors, raw land is a limited resource, making it extremely valuable. If you purchase land in an area that is headed towards development and growth, there’s a chance your land can become worth even more.
Investors looking to develop raw land should mind their due diligence and thoroughly educate themselves on the market where they plan to invest. The best way to do so, is to pay attention to market trends.
If you can track the market’s cyclical movement, you will have a better understanding of when to buy. You must first examine the recent developments in your selected market. If there has been a recent surge in development projects in the area, it is likely that buyers will be looking for land. It is also smart to look at the growth in surrounding markets.
Now that you have an overview of raw land as an investment, we’re going to go through the raw land development process step by step:
The first step of raw land investing is to determine its economic feasibility. Like any real estate investment, it’s critical to determine your desired return on the property before getting started. This is important because it will not only lessen the uncertainty of the market, but it will also provide a model of the costs versus profit aspect to your investment. Although the numbers will simply be an estimate, understanding the feasibility of your project—including the estimated costs, revenue and overall return—will better assist investors to succeed.
Once you understand the costs you’re likely to encounter—including what you should receive in return—you can better determine the offer price. It’s important for investors at this stage of the process to have contractors submit actual bids for the project. This will not only provide estimated costs for the project, including the numbers of what you’re expected to spend, but also a max offer price.
Stage three of raw land investing deals primarily with the design of the land. In essence, this pertains to what type of property should be constructed on the parcel, including taking a look into local zoning codes.
Depending on the type of property you’re looking to construct, or how you intend to present the property to buyers, zoning will play an important role in how you proceed. Zoning codes will essentially determine what types of properties—whether single-family, multifamily, condominium or commercial—can be built on the lot. As an investor, this could ultimately hinder your investment approach. When getting started in raw land investing, it’s vitally important to understand the zoning laws in the area.
Like all real estate investments, the way in which you intend to use the property will dictate the type of financing you obtain. The one aspect investors should care the most about is the loan-to-cost ratio (LTC). In essence, the LTC is the amount of money the lender will provide for the project, which will generally depend on the type of construction and use of the property. Although the majority of lenders will only provide a percentage of the overall costs (generally between 80-85 percent), owner-occupied homes are eligible to get standard bank financing.
The second-to-last stage of the raw land development process is construction. In most cases, this will consist of horizontal development—like grading for roads, curbs and utilities—and eventually building the property from the ground up. One element investors also need to be aware of is the construction financing aspect of the project. Generally speaking, contractors will be paid in increments of duties performed, including phases of the project. In many cases, construction lenders will hold back approximately 10 percent of the construction loan until the project is completed.
[ Check out our guide about how to get started with constructing new build real estate on your land development to learn more. ]
The final step to the land development process is marketing. This is where stage-one is of critical importance. Researching the neighborhood, the market price, and demand for rentals will pay off when determining your marketing strategy. Investors should also have a marketing plan in place to attract buyers to the property. This may include working with a realtor, online listings, the MLS, advertising in newspapers, and even social media.
The attraction to the land development process is easy to see: this undeveloped asset not only costs less to purchase than a developed lot, but also is generally less expensive to own over time. There is more to like, however: it offers appreciation potential whether or not the vacant area is improved upon. While there are many risks and rewards in real estate investing, raw land is one of the more secure investments to make. To gain a better understanding of the investor appeal, here are the five main advantages to raw land development:
Unlike regular real estate investments, which are currently experiencing higher-than-normal competition in most markets, raw land has virtually no competition to deal with. In most cases, investors are looking for established properties, such as residential or commercial properties that provide an immediate source of income. Unless optimized to do so, undeveloped land will generally not earn income on a regular basis.
Raw land investments award owners more opportunities to use seller financing. Since traditional lenders (i.e. big banks) are often more hesitant to loan money for vacant land, you—as the owner of land—get to act as the bank. If someone is in the market for raw land and can’t acquire a loan, you can lend them capital but charge them higher interest rates. This is a win-win situation for every party involved.
In comparison to acquiring a developed property, buying raw land is relatively inexpensive to acquire and own. It not only has minimal carrying costs, including lower property taxes and insurance, but maintenance costs are modest. In fact, performing maintenance on undeveloped land isn’t required, as a vacant lot can be purchased and held on to until appreciation rates reach a level where it can be sold for a profit. In addition, undeveloped land owners are generally highly motivated to sell because they are typically absentee owners with little-to-no emotional connection to the property. That said, the right property can provide immense upside for investors with a strategy in mind for the land.
Arguably the biggest benefit of investing in raw land is its appreciation potential. Even in times of economic uncertainty, raw land is a hard asset. Since land is such a scarce resource, it will always be valuable, even if market conditions are rough. Raw land will always be needed, regardless of whether or not it holds economic value. On the other hand, if the economy is thriving, there is a higher probability that your land’s value will appreciate. As land continues to be developed, vacant property becomes harder to come by. Consequently, the vacant land that is left over becomes more of a commodity, especially if it’s in a popular area.
As an investor, the allure of raw land investing is in the opportunity it holds. Aside from earning long-term appreciation, the land can be developed into further possibilities, like a single-family home, multifamily property, or condominium. Although zoning and building codes may limit an investor’s opportunities depending on the location, raw land offers the ability for investors to choose and develop their own investment path from scratch.
Raw land development is not for the faint of heart. The process can require extensive time and research, especially when compared to a traditional residential investment. However, as I mentioned above, the right preparation will make a raw land investment well worth it. Read through the following tips on developing raw land before you get started:
If you are looking for a profitable real estate investment strategy, it may be time to consider a raw land development. Investing in land has a number of advantages over other investing opportunities. Follow the steps outlined above if you hope to realize any level of success with raw land development. Separate yourself from the competition and add a raw land investment to your portfolio.
We at IIG work with several developers and frequently keep our eyes open for land for sale. If you’re looking for additional information on raw land development or looking to purchase, give us a call and we’ll work with you to provide the best solution to fit your needs.