Real estate investors have a multitude of choices - residential rentals, other commercial properties like office buildings and hospitality centers, retail operations, and more. Every class and sector offers potential pros and cons. Investors can also decide to purchase real estate-backed securities or fractional interests in asset portfolios by investing in REITs (Real Estate Investment Trusts) and DSTs (Delaware Statutory Trusts).
One enduring choice for investors is raw land. Raw land is property that has not been improved - no access to water supply, electricity, or sewage. Yet, despite the lack of improvements, raw land may increase in value. The most significant reason is that supply is finite, so when demand grows, the price also does.
Raw land can be a long-term investment or a quick flip, depending on when and where you buy it. For example, if you own undeveloped land in a growing area, you may be able to sell it quickly and for a profit. On the other hand, if you need to hold on to the parcel for an extended time, there is no maintenance or upkeep cost.
Depending on the investor's aspirations, buying raw land can be riskier than buying developed property. Typically, what you do with the land is governed by zoning laws, which can change and which the owner may not be able to influence. A zoning change could prevent the owner from achieving their goals for the property and may diminish its value.
As with any investment, undeveloped real estate offers potential, but whether you can achieve your goals depends on some external circumstances. Choosing a parcel with development potential will help if that is your intention, but raw land can also be an effective hedge against other investment risks. Where the property is located, how much you pay for it, and what happens in the surrounding areas will all influence the potential for future profit.
Investors should also remember that if the land value increases, you can use it in a 1031 exchange. This tactic allows the investors to swap one investment property for another without immediately paying capital gains taxes on the relinquished property as long as they reinvest the proceeds in a "like-kind" asset.