Tailor Your Portfolio with a Land Investment
By Taylor Miller, OBA Project Specialist
While residential and commercial are the more conventional real estate investment route, there are extensive benefits to investing in land. Above all else its profitable, but it also allows for an array of investment avenues. Buying a large tract to divide and sell off the smaller tracts, holding onto a tract for future retail development, and purchasing farmland are all viable options each with their own balance of risk, market factors, and investment return timeline. This allows investors to supplement their portfolio in accordance with their risk tolerances and goals. After considering the tax benefits and long-term value appreciation, investing in land can be quite an enticing asset if properly researched and strategically planned. In this article, we’ll explore why buying land can be a flexible and profitable alternative investment strategy.
A land investment is full of possibilities. To an investor that presents the opportunity to embolden their portfolio with a property that fits the bill in terms of risk, timeline, and market concerns. For example, the risks associated with buying agricultural land to lease out and hold for future retail development are far different from buying a small tract to quickly develop and sell back as a residential vacant lot. There is certainly more risk in the latter, but the buy and hold option suggests a larger profit margin and longer timeline. Each land investment route offers its own unique combination of factors which is why land investment is a keen addition to an investment portfolio.
There’s also dividing and selling a large tract of land. The key here is to make sure that the sum of the parts will be more valuable than the whole. This requires a plan and careful market research by a savvy real estate professional. Generally, you want to find the uses of those individual lots where they are most valuable and have the most market competition. This is often referred to as the highest and best use which is an analysis included in any appraisal report. You could buy one large lot where one portion is sold as farmland, another as wooded hunting land, another for a residential subdivision, and another to hold on to for anticipated future retail development. Whichever development strategy may be most lucrative, it will also need to be in accordance with the local zoning ordinances and market conditions.
With a myriad of development possibilities, there are also several benefits to simply owning land. Unlike with residential and commercial real estate, land is a finite resource therefore supply is inherently limited making it a valuable asset with intrinsic worth. As population growth continues and urbanization spreads, the demand for land only increases, driving up its value over time making it an attractive investment proposition. Without any structures or tenants to tend to, vacant land is a very low maintenance investment. Once acquired, land typically requires only periodic maintenance such as land clearing or property tax payments. Based on these two factors alone, land is an ideal asset for investors seeking a long-term investment that doesn’t demand too much attention to be diverted from their current investment portfolio.
Land can help round out a portfolio as it acts as a hedge against inflation. Historically, the value of land rises with the cost of living, offering a reliable means of preserving wealth over a long period. Land ownership offers a degree of protection against currency devaluation, geopolitical instability, and economic downturns, making it a valuable component of a diversified investment portfolio.
Finally, the tax benefits in owning and developing land can be instrumental for an experienced investor depending on the specific jurisdiction of the land. Investors may be permitted to write off property taxes and property interest as a deductible. as from tax Depreciation allowances and capital gains tax exemptions are available for certain types of land investments. You can also hold land in tax-advantaged accounts such as self-directed IRAs or 401(k) plans, allowing investors to leverage tax-deferred growth and maximize their investment returns.
Buying land represents a lucrative alternative investment strategy with numerous benefits and opportunities for practical investors. From its intrinsic value as a finite resource to its potential for numerous development opportunities, land offers a compelling combination of stability, growth potential, and diversification. By incorporating land into their investment portfolios, investors can hedge against inflation, enjoy tax advantages, and leverage their capital. While land investment requires careful research, due diligence, and long-term vision, the potential rewards make it a worthy consideration for those seeking to build wealth and secure their financial future.
This article was published in the July / August 2024 edition of the Think Realty Magazine and can be viewed online at Think Realty.
