If you’re looking for the perfect real estate investment opportunity you’ve probably been looking at homes – but have you considered buying vacant land?
There are several significant differences to consider when purchasing a lot rather than a house. From property taxes to resale value, here are a few points to consider.
What is the Zoning?
When you purchase a home, you can typically take an educated guess that the zoning for the land is residential. On the other hand, when a lot is vacant, it’s imperative that you learn the usage it is zoned for.
From an investment perspective, the value of the land will be determined by how it can be used. For example, vacant land that can not be built on due to zoning issues is a lot less attractive from an investment standpoint than a piece of land that can be utilized.
It’s also worth noting that even if you purchase a piece of land with an existing building on it, it’s still essential to find out whether the zoning has changed since the structure was built. This can sometimes happen due to soil contamination among other issues – and will be a determining factor in whether the property is a good investment or not.
Can the Land be Subdivided?
Subdividing is the act of dividing a tract of land into several buildable parcels. Acquiring a piece of land that can be subdivided can be an excellent investment opportunity.
One of the main benefits of being able to subdivide land is that it may be more profitable to sell the property as several parcels, as opposed to one large piece. Another advantage is that it allows you to liquidate part of your real estate without having to sell the whole piece. Before you purchase land with the assumption that it can be subdivided, you must do your due diligence. Multiple factors can affect the ability to subdivide, from neighborhood covenants and ordinances to deed restrictions. It is imperative that you seek the advice of an experienced real estate professional before making any decisions.
What Are The Tax Implications?
Whether you purchase a tract of land or a property with a home on it, you are liable to pay property taxes.
Local taxing authorities periodically assess the value of all properties within their jurisdiction. The taxable value of the land depends on the property’s assessment. While the method of assessment can differ between built-out and vacant land, the process still aims to determine the lot’s market value. Property taxes are ad valorem (according to value), so the lower the assessed value, the lower the property tax will be.
Land tends to be valued according to its ‘highest and best’ use. It’s important to bear in mind that this may not be the lands current use. Depending on factors such as zoning, available amenities, and local laws, there are several possibilities for what could be construed as the lands highest and best use.
A final point to consider is that land is taxable – whether it is making a profit or not.
Purchasing an investment property requires more maintenance than owning a piece of land. Buildings require upkeep and renovations to keep them usable or to improve resale value. Investment properties must be managed by the investor themselves, or a dedicated property manager. Tracts of land, on the other hand, do not require an investor to know anything about how to renovate or manage a property. The only important thing that you need to know about vacant land is: “Is it suitable for building?” If someone else can build on the land when you are ready to sell it, your investment should be secure.
It’s also prudent to note that the IRS does not allow you to depreciate land; however, a building can be depreciated for tax purposes. For example, if you make renovations to an investment property, it is possible to depreciate the cost for this, along with the home value.
Cash Flow Potential
Land has little cash flow potential compared to a house. Options are limited to land lease, agricultural usage or boat & trailer storage.
An investment home, on the other hand, can be rented out to generate a consistent income. Of course being a landlord comes with other responsibilities, but if you would like an income while also waiting for the property value to increase, renting would be the ideal solution.
The resale potential of both raw land and developed real estate is dependent on several factors. Considerations such as, “does the local area have a strong real estate market?” and “is there demand for this particular type of real estate?” are important in determining how easy the sale of the property will be.
Houses tend to sell more quickly than land alone. This is because there is a higher demand for homes that are already built and move in ready. Land, on the other hand, takes a particular type of buyer, who is willing to invest the time and money required to develop the land.
Whether selling land or a house, it pays to have a knowledgeable real estate agent on your side. There are many benefits to working with a professional, such as helping you understand the market and creating a strategic marketing plan to target the right buyers. Any investment should be treated like a business opportunity. Maximize your profit by doing your due diligence and seeking professional help when required.