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What You Need to Know Before Investing in Land

Buying Land Can Be Profitable for Savvy Investors Who Do Their Research on the Risks and Rewards

Credit: Shutterstock
Credit: Shutterstock

When most people think about investment property, they usually envision commercial buildings or multi-unit rental properties—an investment that's already built. However, buying vacant land can be a profitable strategy for real estate investors when done wisely.

There are several questions investors should ask themselves before purchasing land as an investment.

Do You Plan to Build, or Hold and Resell?

Some investors buy land because they plan to develop it themselves, while others hope to "flip" the still-vacant land to a future buyer, ideally at a good profit. If you plan to develop the land yourself, factors that impact your ability to build or start construction immediately will be of high importance. This could be as simple as needing to plan for vehicle access or providing water, sewage, and other utilities. Even if you plan to resell the land without building, these issues will still matter because they will affect the resale value.

Are Values Likely to Increase in That Location?

As always, the most important thing in real estate is location. This is especially true with vacant land, because the primary value is the potential of what could be developed there—and the location has a big impact on that.

Different locations will appeal to certain investors, depending on their comfort level with risk. Investors who seek minimal risk would likely want to focus on areas that have already been tested and proven, with successful developments nearby. Though there can be significant profit potential for savvy investors who are adept at spotting up-and-coming areas on the brink of rapid growth.

What's the Best Potential Future Use?

This will depend on the land's location and trends that indicate what will happen there in the near future. If many new businesses are setting up shop nearby, this could indicate there will soon be strong demand for residential property, meaning a large, multi-unit apartment complex could provide a high return on investment as the area develops.

Will Restrictions Affect Resale Value or Impede Development?

Many properties are subject to zoning ordinances or local regulations that specify the types of buildings or commercial operations that are allowed there. This trips up many investors, and can be a costly mistake if you don't thoroughly research any restrictions on the land—or the general area in which it is located—that affect what you can or cannot do with that property.

Before making an offer on vacant land, be sure you do your research. This is where a good surveyor and title search specialist can be a valuable asset.

What Pre-Development Investment Is Required?

There can be hurdles and unexpected expenses when building on vacant land. If utilities are already accessible, that will be a big advantage, as the cost of installation for things like power and water service can be significant. For example, the estimated cost just to run a new gas line can be anywhere from $15 to $25 per linear foot, according to HomeAdvisor. Likewise, if there is already road access, that will reduce the costs involved with future development.

Are There Other Potential Sources of Revenue That Don't Involve Building?

Sometimes the most valuable part of a parcel of land is the land itself. Look into any possible "hidden" value the land may have, such as potential revenue from timber or crops, or mineral rights.

In some parts of the country, property owners are generating considerable income from leasing their mineral rights to gas companies or other entities. To determine the potential value of your mineral rights, you may need to get a soil or mineral resource report, or similar study. This is another situation where you will also want to do a thorough search of the property's title and any existing claims, to ensure someone else doesn't already have a stake in the mineral rights.

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