Ways to make money from raw land investments
Investing in raw land is said to be riskier than buying developed properties. However, there are ways to make money from land and some benefits over developed properties in holding it.
Land sales have increased since the real estate market crash in 2008, but many plots are being snapped up by investment companies now.
Benefits of owning raw land
Less competition in buying it
Owner financing is very possible with raw land since not as many people are in the market for it and the owner may be eager to sell. Using owner financing, you might get more leverage potential than you can with developed properties.
Less hassle with tenants
Many potential real estate investors (me included) hesitate to take on tenants due to the many management problems they can introduce (failure to pay, property destruction and etc). Many types of raw land investments avoid these issues.
No buildings to maintain
Buildings require continual maintenance to keep them in income producing form, land does not. You may, depending on it’s location, however – need to clear or mow it.
Drawbacks of owning raw land
Lower (if any) cash flow
If you buy in the wrong place, you may end up with having your money tied up for years with no income at all.
Sometimes investors get nasty surprises as to timing or direction of future development. Our metro area put up a new interstate and an international airport far from the developed part of the metro – almost 30 years ago. Investor snapped up land along the highway leading to the airport thinking it would develop rapidly. It still is largely rural today.
You still have to pay taxes and might need liability insurance
Although taxes on undeveloped land are typically less than on developed properties, taxes always have to be paid. If you have no income, you may end up with a negative cash flow.
If your land is close to developed areas, you may want to get liability insurance on it in case you have trespassers who get injured. Also, if you use your raw land for any purpose that involves people, you want to protect yourself by having liability insurance.
You usually have to hang onto it longer to get your profit. It is not uncommon to hold land for years before arriving at your profit point – if you ever do.
No income tax deductions
Sometimes, depending on your situation, you can deduct certain parts of your mortgage from your income taxes, if you own a developed property. There is no similar deduction that I know of for land.
Ways to make money from land
Subdivide for land sales to developers
If your land is close to or within developed areas, you might be able to subdivide it and sell it to developers to put up houses or commercial buildings. You need to check local zoning and regulations and also run a variety of tests on the soil to ensure the land is suitable for development. For instance, if septic tanks are to be used on large semi-rural lots, the land must pass a local health department soil test. Also you want to check out the load bearing capability of the soil – who wants to build a house on a swamp?
Flea Markets, Parking lots, RV storage, farmers markets
If your land is in a high traffic area, you could develop it a bit in order to host these types of activities. You need good road access, private roads onto your land, zoning clearance, lots of marketing and possibly some structures (permanent or temporary) to handle people needs (such as bathrooms, water availability, first aid and etc). You charge by the space for each event or time period. Check local regulations to see what kinds of business permits might be needed.
Parcel and sell lots for recreational purposes
If your land can be accessed via paved roads, and is in an area that is popular for sightseeing, hiking, boating, swimming, hunting or fishing, you might be able to do land sales of portions of your land. You could put up a very basic building or mobile home to make it instantly usable by the new buyer. As always, you would need to check zoning laws and local regulations to ensure compliance.
You really need to check out all zoning in your area for all entities before considering letting a billboard go up. Many areas along highways are now discouraging them. Check with multiple companies for an idea of monthly rates.
Cell Tower leasing
Cell phone coverage is still expanding and, depending on where you are, you may be in the path of cell network’s who need to lease land for cell towers. According to Bryan Wittenmeyer in Real Estate Business and Investment Opportunities, rental contracts typically run for 5 years with the potential for 4 renewal periods. You might get $300- $500 a month rental for that period.
Agricultural land – as an alternative investments
Investment managers are now working with land management firms to provide an alternative investment in farmland. The land management firm buys the land, leases it back to the farmers and provides management. Individual (accredited) investors then buy into the land management company via investment managers who have it in their portfolios. Land sales are snapped up from our family farms to feed this particular machine. See our article Farmland Alternative Investments for more information on this.
Tree sales (lumber, firewood, tree farming)
If your property has a lot of mature trees, or if you are willing to plant them as a future income flow, consider using sales of the trees to generate income.
You can hire a forestry consultant or check in with paper companies and sawmills to sell trees. Smaller trees can be used for paper. Scrap wood can be used for firewood and large trees (12+ inches in diameter) can be used for lumber.
Alternately, you could plant Christmas trees or (if you are young and will hold the land for years) plant seedlings of valuable species and let them grow. Obviously these incomes take years and some effort to realize.
We planted short leaf pine on our Ozarks farm years ago. Although we didn’t harvest, it eventually helped us sell the acreage because the trees were so large and pretty.
If your land is not close to your home and you don’t supervise it, you may get trespassers who harvest your trees for you. This happened to us.
Buy cheap, hold, sell cheap
Check out land sales from inheritors that don’t want it or from county tax sales or auctions, you might get your piece of land under market value. Care must be taken to check out the land to ensure that you aren’t buying something toxic (See our series on land tax sales for more information).
Use as an inflation hedge and enjoy the land
Land typically rises in value with inflation. If you can afford the taxes and enjoy rural experiences, consider buying and holding land as an inflation hedge.
There used to be a federal program (back in the 1960’s) called the land bank, where farmers would get paid to NOT plant crops. The land had to have been previously planted to qualify. My Grandfather owned 200 acres of rural farmland which he had previously planted in soy beans. He benefited from this program for years. Back then, I understood the idea to be that by not planting so much, the crops would be more valuable and the farmers would not then need US subsidies to continue farming.
As of 2006, according to the Washington Post article Farm Program Pays $1.3 Billion to People Who Don’t Farm we are still paying folks NOT to farm.
I include this just for thoroughness, I don’t really encourage folks to be on the dole.
How have you made (or lost) money from raw land?
Disclaimer: I do not consider myself an expert in land investments. As always, consider all implications of any investment and consult appropriate authorities about your specific situation prior to letting go of your hard earned money!