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Why People Buy Land, and Why You Should Do It, Too

Many people invest in stocks, bonds and other investment products, but one of the most important vehicles is often overlooked: land. Land is a limited resource, and owning a piece of land can be a very worthwhile investment. But, you're also taking a great risk when you invest in land.

Why Investing In Land Comes At A Risk

There’s always a risk when you invest in any financial product. Land is risky mainly because of poor planning. When a person buys swampland 200 miles outside of a major city, there’s a good chance that they won't make a return on their investment.

You need to be smart when investing in land to ensure that you make a return. Before we discuss why land is such a great investment (when it's done right), it’s important to know what puts you at risk of making a bad land purchase.

·         When the land's property taxes outweigh the land's growth. If your property taxes are $200 a year and your land is only appreciating in value by $100 a year, you’re not making a smart investment choice. Unless the area is starting to grow rapidly, you’ll want to sell this piece of land as fast as possible.

·         Land is not a short-term investment unless you build a structure on the property. in other words: don’t expect to buy land and have its value skyrocket overnight.

·         Land typography is a difficult and complex concept to understand. If the land is barren or flooding is common, this property will be worth much less than its counterparts and will be harder to sell.

·         Zoning is very complicated for a new investor to understand, so it’s important to know what type of land is being purchased. If you buy land that's meant for livestock and you don’t realize that you can’t build a commercial structure on the land, the land may not be a good investment for you.

Unless you have plans to build a structure on the land or find some form of income that can come from the land, you want to make sure that you choose a location where growth is booming. This means that you can expect the cities around the land to grow, and the land to become more valuable as more people move to the area.

If you tried telling someone that land in California in the 70s was a bad investment, they would laugh at you because prices have skyrocketed and made a lot of people rich. But, if you asked the same question to the people that live in West Texas (i.e. the desert), they will tell you that investing in land is not a great opportunity. Why? Because this is not a high-growth area.

The truth is that an investment that isn't fully researched and understood is a bad investment – period.

Why You Should Buy Land

So far, we've talked about why there's a risk when buying land. But, there's always a reward at the end of the tunnel for the smart investor. When I look for land to buy, I do it on the basis of how I will monetize the land. I want to make sure that I will make a return on my investment.

How is this done? First, I want to decide if the land will be used for a long-term commitment. This is land that I would expect to own for longer than 10 years. In fact, I might own this land for 20 to 30 years in some cases.

The first thing I look at is the property tax. Again, you will need to pay property tax annually in most states. If the property tax in the area is substantial and the return on the land is minimal, it may not be the right investment choice for you. The concept is similar to stocks where dividends are paid to the stockholder. Since the land will not provide an interest payment or any payment at all, the property tax is a major consideration.

You don’t want to pay thousands of dollars in property tax when the land value is staying stagnant.

This is when I do a little digging and find out how the city that the land is located in is growing. A great example of this is Houston, Texas. According to data, 35,000 new people moved to the state between 2013 and 2014. The entire state of Texas is booming and is among the top 10 states with the most growth. Top growth cities include Austin, Fort Worth, San Antonio and Dallas .

Texas is a state where you do not pay state taxes at the end of the year, and property taxes are low. The housing market is starting to boom in the state and people that purchased land even five years ago are making a great return on their investment. Harris County in Houston announced in April 2014 that property values rose 16%.

This is far higher than a stock market gain or anything you would see from a bond.

There are also other alternatives if you want to ensure that the land will return a high profit:

·         Can you monetize the land? If the land can be grazed, you may be able to allow farmers to rent the property and use it as grazing land. This will at least pay for your property tax, meaning that your property can appreciate at a slower rate while you still make a profit.

·         How much would it cost to build a three bedroom home on the property? Three bedroom homes return the highest ROI, and are the most desirable homes. Determine the average home value in the area, and determine if buying the land and building a home on the property will provide a profit. For example, if a $200,000 home has a property value of $30,000, you’d want to make sure that you could build an equivalent home for under $170,000. And, you would need to account for other fees, such as building permits, clearing the land and various construction costs that will arise.

With housing prices on the rise, many people regret not buying land 20 years ago. But, if you bought land right before the housing crisis hit, you are probably still underwater with land that is now undervalued.

If you make the right choice by analyzing the land and determining its uses, you can find great properties that will provide more of a return than what you see on the normal stock market index.