Raw land is property that hasn’t been developed or built upon. It lacks buildings or structures, public utilities like sewer, water, or power and paved roads. It’s speculative and generally doesn’t generate income.
However, raw land can be an attractive opportunity to diversify your portfolio. The asset could generate a reasonable return, assuming the land has potential for development, but it carries unique risks, including long holding periods, market fluctuations, and zoning uncertainties..
As such, putting money into this type of real estate requires careful planning and due diligence. The steps necessary to help you with raw land investments are as follows.
#1–Define Your Investment Goals
Raw land is a long-term investment that should fit with your future objectives. Questions to ask yourself before searching out raw land might include:
- Its purpose: Are you buying land for residential, commercial, or agricultural development? Are you subdividing the land for multiple projects?
- Your investment strategy: Do you plan to hold the land for appreciation or develop it with infrastructure and utilities for future resale?
- How to finance the buy: What is your budget, and how will you raise capital for the acquisition?
It’s important to have a strategy in place before you begin your raw land search. Furthermore, understanding your goals can help you target properties that align with your investment strategy.
#2–Explore Financing Options
Financing raw land can be more challenging than financing other real estate forms. However, there are payment options available, including:
- All cash. If you have enough money, buying the land with cash can provide immediate ownership without worrying about loan applications or interest rates.
- Seller financing. Depending on how motivated your seller is, they might be willing to finance part or all of the sale. Some sellers might also offer flexible payment plans.
- Land loans. Some banks and credit unions specialize in lending money for land deals. However, these loans might have higher interest rates and require a larger down payment.
- Government programs. Some state and federal programs could provide tax incentives or financing on land buys, depending on your plans for the acreage and where it’s located.
Your financing strategy should be in place early on so you can take advantage of opportunities and make informed decisions.
#3–Research the Destination
Real estate is all about location. The location of raw land is especially critical. If you find acreage that offers development or appreciation potential, be sure to examine the following:
- Zoning laws. If the land is zoned for your intended use, so much the better. If not, you’ll have to prepare paperwork and appear before planning and zoning committees and city councils to request zoning changes. This can take time and money.
- Infrastructure proximity. If your targeted land is near roads and utilities, you could lower the costs of installing sewer, water, and power lines or developing paved streets. In some cases, the city where the land is located might agree to take on some infrastructure development costs.
- Market and economic trends. Researching the local market requires understanding what asset type you might develop (retail, residential, or office) and how economic factors might impact the performance of those built assets. Studying the area’s historical data, supply and demand, and projected growth can be helpful.
When researching the location of your target land, it’s a good idea to work with a local real estate broker or land specialist. These experts can provide insight concerning prime locations, market conditions, and additional information.
#4–Conduct Due Diligence
Due diligence is collecting and analyzing data before acquiring raw land. Perform thorough due diligence before committing to a purchase. Key aspects to investigate include:
- Legal review. Research the land’s title, zoning, easements, restrictions, and legal description. Other issues to consider are baseline documentation reports, previous liens, and mineral searches.
- Environmental assessment. Analyze environmental reports and compliance with regulations. Also important is determining the state of the land’s soil (i.e., if it has chemicals or other pollutants). Topography should also be studied to determine suitability for development.
- Real estate tax assessments. You’ll likely pay taxes on the land. Be sure you can afford these costs, as the land won’t generate immediate income.
Hiring professionals such as surveyors, environmental consultants, and attorneys can help uncover potential issues before you close the deal.
#5–Negotiate and Close the Deal
After extensive research and due diligence, you’re ready to make an offer. Key points to negotiate and discuss include:
- Price, payment terms, and financing
- Contingencies based on inspections, environmental tests, and zoning approvals
- Closing costs, fees, and other expenses
Before finalizing the transaction, work with a real estate attorney, who can develop and review the contract to ensure that all legal aspects are covered.
Adding Raw Land to Your Investment Goals
Raw land is a strategic investment that requires research, financial planning, and due diligence. Understanding zoning laws, conducting proper inspections, and exploring financing options can help you make informed decisions and take advantage of opportunities that could result in profitable outcomes.
If you want additional guidance on real estate investment strategies, visit realized1031.com.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
