Investing in raw land has long been seen as a high-risk endeavor by many investors. While land values generally appreciate over time, there are many factors that can lead to losses when purchasing raw, undeveloped land. In this article, we will explore the risks of buying raw land as an investment, and the key considerations investors must make before committing capital to such projects. With proper due diligence and understanding of the risks, land investment can be profitable, but it requires extensive expertise and experience to navigate the complexities involved.
Lack of cash flow from raw land increases risks
One of the biggest risks of land investment is the lack of cash flow generated before development. Unlike investing in income generating real estate like rental properties, raw land does not produce any rental income while awaiting development. The investor has to self-fund property taxes, maintenance, and other carrying costs during this period. If the development plans fall through, the losses can pile up quickly with no offsetting revenue. Conservative financial planning is essential when budgeting for raw land investment.
Development costs and risks may be underestimated
Investors new to raw land investing often underestimate the costs, complexities, and risks involved in the development process. After acquiring the land, major expenses will include infrastructure development, zoning and permitting, construction, marketing, holding costs and more. Delays are common and can leave the investor exposed to greater risk. Many investors do not realize the level of expertise needed to successfully navigate development.
Market demand and absorption rates are hard to predict
Predicting future housing demand and absorption rates years in advance requires deep market expertise. An investor may buy attractive raw land today, only to find that market conditions have deteriorated by the time the finished lots are ready to sell. It is difficult for everyday investors to forecast market movements so far in advance. Hiring experienced analysts and brokers is essential before buying.
Remote locations have fewer exit options
Raw land parcels in remote locations carry higher liquidity risk. If development plans fall through, or market conditions decline, it can be difficult to find buyers willing to acquire remote, undeveloped land. Parcels near growing suburbs and cities generally have higher demand and liquidity. Investors should focus their search on locations with healthy demographic trends.
Special expertise is needed to identify promising land parcels
Identifying promising raw land parcels requires specialized expertise in land development. Factors like zoning restrictions, utility access, soil conditions, flood risk, and surrounding parcel ownership can make or break a development. Most everyday investors lack the in-depth knowledge to assess these development feasibility factors. Partnering with experienced land developers and civil engineers is highly recommended before investing.
In summary, while raw land investment can be profitable for experienced investors, it carries major risks that make it unsuitable for everyday individuals. Lack of cash flow, development challenges, market uncertainty, illiquidity, and the need for specialized expertise pose hurdles. Proper due diligence, conservative financial planning, and guidance from development experts are essential for effectively managing the risks of raw land investment.