When it comes to building a profitable business and investment portfolio or entrepreneurs preparing themselves for retirement, diversification is always recommended. With the market being as volatile as it is, exploring additional sources of income for your business can help you mitigate your risks and find new, profitable markets – like the real estate market. According to the Natural Resource Economics Division, only 60 percent of land is privately owned in the U.S. House prices are rising fast, demand for commercial real estate is growing, and prices for vacant land remain favorable in states like Virginia and Texas – making this an ideal time to consider adding land investment to your business portfolio. However, before you enter the world of land ownership, there are a few key questions you must ask yourself to make your land investment a successful business venture.
Do You Have A Property Investment Plan?
If you are looking to add investment property/land to your business, you need a solid investment property plan. There is a magnitude of property investment options out there. One of the perks of investing in land is the versatility it can have. You can choose to develop it for commercial or residential real estate, pursue a buy to let business, or leave it to capitalize on value appreciation in the future.
Similar to the inclusions in a business plan, your land investment plan acts as a general outline of your aims of adding land to your business portfolio. Narrow down the kind of land investments that fit your budget, business goal, and expertise. This also helps you to identify potential areas for your land investments. For instance, if you are considering ranch land as your investment, Texas and Colorado may stand out as potential go-to locations. Almost 40 percent of the ranch land bought and sold in the U.S. is located in Texas.
Have You Identified Key Interest Areas For Your Land Investment?
Next, it is time to consider what land markets interest you and align with your business. If you are entering a completely new market, it pays to do your research beforehand. While any type of property investment can be lucrative, you should always be aware of the risks of the market you are entering so you can work to avoid them.
If you choose to pursue commercial land investment, the investment on your return may be higher. Commercial properties usually have a return on the price of 6 to 12 percent. However, being a commercial landowner can also require more time commitment, a larger initial investment, and more risk exposure. Also, it is worthwhile doing your research on how usable the land is if you plan on buying vacant land. This includes finding out the Assessor’s Parcel Number which will indicate ownership of the land and any federally designated wetlands located on the property. If there are wetlands on the land you are purchasing, you may be required to secure additional protection, such as compulsory flood insurance for land in flood zones, or backdated debts for unpaid property taxes.
Are You Clear On The Kind Of Financial Responsibility That Comes With Your Land Investment?
As a general rule of thumb, you should always view land investment as a long term investment – even if you plan on flipping it or doing a short term hold. This is mainly because the real estate market is very volatile, and it can take some time to find the right tenant or develop the land the way you ideally want it. Construction can get waylaid, or leasing agreements can fall through, which adds additional costs to your overall investment. So while owning land can be cheaper thanks to no mortgages, there are still several add-ons you should account for when budgeting for your land investment.
Look to your most recent cashflow position to determine whether you can afford to not only buy the land, but continue holding it. Land may require regular maintenance costs, patent of property taxes, and remedial works for water and utility access (if you opt to buy in a rural area). Be sure to create built-in buffers into your investment budgets for diversions or unexpected costs, such as refiling for planning permissions or the cost of getting the land ready for rental. It may take some time for you to begin seeing an income stream from your land purchase, so make sure you are comfortably positioned to fund and maintain your land investment until then.
Finally, many land buyers often face difficulties securing financing for their land investment, as lenders tend to hesitate when it comes to financing raw land. So, look at your budget and gauge whether you can increase your cash deposit to 30-50 percent or seek private seller financing. Adding land investment to your business is a great move. Like any other business venture, it takes preparation and research to get on the path to success. Getting your finances in order, doing your homework on the risks, and mapping out a plan for your land investment is a great start.