Traditional investing advice has it that investing in land is the wisest choice in real estate. A recent report by the Urban Land Institute states that thanks to an upswing in housing and commercial construction, coupled with rising land prices, buying land is a sound investment. But according to Jason Hartman, land is actually a pretty speculative investment – it’s not the land that offers long term returns on the investment – it’s what’s on the land.
One real estate investing strategy is to buy land at low prices and either build new structures on it, which can then be rented or sold, or hold the land against a future time when it can be sold for a higher price. But as Jason Hartman says, that’s precisely why land investment is speculative. Land values may rise in some markets, but the potential for a return on that land depends on other factors.
In order to see a return on a land investment, the land must have something to offer that yields a profit over time, and vacant land offers little in the way of ongoing returns on the investment, Rather, this kind of purchase gobbles money in the form of property taxes and any other costs deriving from local and state ordinances. Land values may fluctuate, but it’s the structures on the land which can appreciate and yield income.
But building those structures depends on conditions in the housing market overall. In markets where construction is flat and building costs are high, it may be prohibitive to develop that piece of land. The prices of the commodities that go into the building of a house or other structures fluctuate too, depending on demand and availability. It may take years to see a return on a new house or multiplex placed on that cheap piece of land.
Likewise, holding land against future demand and higher returns is highly risky. Investors taking this path are gambling that years from now, the land will be worth more for its location, or that eventually developments on the land will yield a big enough return to justify the investment. Since trends are fickle and the costs associated with owning that land still have to be paid whether the investment yields an income or not, the chances for a significant return become smaller and smaller.
Investing not just in land, but also in property – which includes land, structures and everything – is a sound strategy that secures a long-term income. Although land is finite and static, improvements – and the potential for improvements – to structures on the property are dynamic.
The Heroic Investing Team