No one will argue that investing in land is a pretty profitable business.
However, will investing in land always bring the desired result to the investor?
According to the specialists and those, who invested their capital in land, these investments will bring profit only in case the investor cares enough to allow for all possibilities and all details of the future deal and will try to turn them for his own benefit.
Characteristic of investing in land
The key question on the preliminary step in investing is how to choose the proper land parcel.
An investor can make a choice concerning a definite parcel only as soon as he sees and understands the designated purpose of land and the peculiarities of the objects he will be able to build there.
In other words, a potential investor in land must always start from the functional use of the parcel.
However, it sometimes happens that the object will be built according to the peculiarities of the land parcel and it causes no problems at all.
The amount of investments depends on how much the parcel corresponds to the demands of the future real estate.
In case of a rather unfortunate choice, an investor will need much investment in land, so that he was able to adjust it to the solution of these or those tasks.
The volume of financial expenses, in its turn, will definitely influence on the return of investment from the bought land parcel and, accordingly, on the realization of the project itself.
Speaking about investing in land, it’s important to remember about the existing restrictions, and in some cases, on the usage of particular kinds of territories.
So, an investor must know that it is forbidden to build major constructions on the areas which serve the rural purposes and forest funds.
It is also forbidden to build industrial establishments in the populated regions, if the activity of those establishments leads to the polluting emissions.
Read also: Invest in Brazil: Advantage and Risks
Another important detail concerning investing in land is the legal cleanness of the land parcel.
Investing in land presupposes the thorough inspection of the whole land parcel’s history.
As a rule, the deals with land are connected to the huge sums of money, that’s why there is a sense to secure yourself and involve highly-qualified lawyers to its formalization.
They will be able to state the legal cleanness of the territory on the professional level, and to prepare all required documents appropriately, including the agreement of sale and purchase or rent.
3 ways of investing in land
Land parcels for further resale under more favorable terms.
Depending on its location and other infrastructure the profit can vary from 25% to 50%, and in some cases it may significantly go beyond the average earning yield.
However, you should pay attention and learn the perspectives for development of that region, where your parcel is located.
If this is some kind of dying small town without proper infrastructure, 2 or 3 years later it may cost even less than you bought it for.
On the contrary, if the town is developing rather fast, your land investment can turn out to be even more profitable than 25-30%.
Parcels bought at the initial stage of building on the living territory and the further resale of the territory with the already finished building.
This way is rather long-termed, and you must be ready that it won’t probably pay back in 2-3 years.
The money in this case will go to purchase the territory itself and to pay for the building and construction work.
You should also thoroughly analyze all perspectives of the region’s development, lest you built the object in the hopeless back-country.
As a rule, such method guarantees you 20-25% of profit and fully depends on the costs of the building materials and parcel’s location.
Interesting: How to Invest in Wine?
Parcels for purchase without construction contract in a cottage estate.
As soon as buy territory you build a house there and then the realized project is sold for the higher price.
Profitability index depends on the sum, which was saved at the purchase of the building materials.
This method looks like the second option, but this one is more reliable.
Firstly, if a cottage estate is being built, it means that the region is promising and you do not need to analyze anything.
Secondly, such objects presuppose creating the corresponding infrastructure – supply of water, canalization, gas infrastructure development and so on.
Main advantages and disadvantages of investing in land
Investing in land just like all financial instruments has some pros and cons.
Now, we are going to discuss them in details.
Advantages of investing in land
Possibility to invest small sums of money.
In some places the territory is cheap and the whole parcel will cost you a couple of thousand dollars. Everything depends on the parcel’s location.
Bringing area to order and building real estate there will always provide you with a possibility to make money on it. Such money-making scheme is considered to be win-win.
Regardless of the type of the parcel and its location, there is always a way to use land and make money on it.
Reliability of investing.
Land market is said to be, just like real estate market, subjected to the constant growth of price.
It allows making money on land, even if you simple buy a parcel and resell it later.
On a note: 17 Tips How to Write a Business Case
Disadvantages of investing in land
Relatively low level of liquidity.
Land is always in demand, though it’s not as high as the demand on real estate.
Buying territory is related to the long-term instruments of investments.
The realization of the possible perspective and profitable projects can increase the attraction to this very territory.
Many countries have a law about land tax, which makes the owners pay it.
Its size may vary depending on the type.
Government does not allow the owners of the land using it at their discretion, because parcels have their own designated purposes, within which land exploitation can take place.
Risks of investing in land
According to the possibility to predict them all risks are conventionally divided on three main groups:
- Risks, which were not taken into consideration and the possible underestimation of the real circumstances, which concern the existing ones before investing in the project.
Situations emerging and the evens’ development, which did not exist when the project was invented and developed.
Still, the problem could have been foreseen, if the analysis of high quality was made covering the whole project.
- The risks, which can be foreseen neither on the preliminary stage, nor during the analysis of high quality.
Besides, there are risks of having a marketing mistake, when the parcel is bought for a price, which far exceeds the average marketing price.
It does not necessarily mean that the future perspective promise only decrease in price under the influence of different factors and you will be unable to profit from the deal.
Moreover, the legal risks appear when some events happen.
They cause a chain of negative legal consequences, which had already been defined by the regulatory acts.
That’s why in order to assess the possible situations from the legal point of view you must definitely hire qualified lawyers.
Never forget about the possibilities of natural changes of the ecological factors.
It may be season changes, which do not allow using different objects (tourist camps, ski centers and harbours), difficulties with transport, especially in the remote regions, seasonal demand fluctuations, etc.
Besides, there may be mudslides, formation of marshes, landfalls, avalanching or floods.
This way, investing in land occupies nearly the first position in the ratings of investments.
So, if you have some extra money and you think where to invest them in order to save your capital and, if possible, receive the percentage from it, you should invest money in land.
It’s one of the best options of rational and effective work with your capital.