Posted by PeteH(NYC) on April 08, 2005 at 17:18:02:
Two major downsides to owning raw land:
It won’t produce any income as is, unless you rent it to a farmer; and
Banks won’t typically lend more than 50% on it;
so all the cash to buy this property will come out of your own pocket – it won’t support itself while you wait for development to surround your speculative plot.
That said, if you can afford to tie your investment funds up with no immediate return AND you can swing the annual property taxes while you’re waiting to take some action, it’s not impossible to make a reasonable return on raw land.
Here are key questions to ask: is the land in the path of expected development – in other words, can you find out what the planning board’s intentions are for the area in terms of current/future zoning uses; are any major retailers aiming to develop surrounding parcels; are sewer/water/utility/transportation lines planned for the area?
Most worrisome part of your question is the phrase “without a clear vision of what to do with it.” You’ll be a LOT more successful investing in real estate if you start each project with at least one exit plan.
Also, it’s worth observing that what seem to be large returns speculating on raw land – take for instance your $55K parcel that would hypothetically be worth $165K in 2015, so tripling over ten years – is only an 11% return. And if you consider that you had to pay, oh let’s say, $1500/yr in real estate taxes for that period, now your return is an annual 9.4%.
If that’s a worthwhile return for you – although it’s based on the entirely hypothetical assumption that the value of those 3 acres will triple in 10 years – then knock yourself out. Personally, I believe that the real money is made in commercial real estate by doing enough homework to turn hypotheticals into modest calculated risks with a large and likely upside.
I’ve ran some searches but still can’t find the answer I’m looking for, if there is one.
I am a total newbie, never even done a residential deal yet. My question is has anyone ever bought acres of land without a clear vision of what to do with it? Just knowing that 5-10 years down the road, there will more than likely be commercial development on it, because it’s along a freeway or something?
I’m in Austin, and there are acres of land for sale for towns surrounding the area that are already growing. I mean 2.5 acres for $55,000, stuff like that. I was wondering if these are decent investments. Heck I would love to have 3 acres to build a custom home on in 10 years if my investment income allows me to do so. But really my intention is to resale it for a profit.
What things should I look for and what questions should I ask the owner?
Look at the tax rate - you’ll probably find it’s 2.2%-3% annually. Historically in this market I believe land has appreciated at an average of just over 3% (don’t recall where I read that). Means your investment will net probably around 1% (not enough to cover finance costs) - there are better buy-and-hold investments out there. You may get lucky and buy at the beginning of a high appreciation curve and make more, or it may be flat for several years and you loose money because of the the taxes. (also bear in mind when you sell, commission is typically 8% on land, so with closing costs you’ll losse the top 10% of value, which could be many years appreciation).
Unless you believe we are at the start of a high appreciation period, pesronally I wouldn’t buy raw land unless I was going to build it within 24 months or I had a buyer lined up already.
$25k/acre is about the right price (i.e. full market) once you get a little out into the hill country (dripping springs area - out on Hwy’s 71 & $290 etc). We’ve been paying under $25k/acre in some nice, well managed subdivisions that are a little out of town to build spec houses on. Look hard at teh accessibility and development around them, there is so much unbuilt land in that price range, it’s hard to pick out ones that may be in the path of growth in a few years (i.e. that may increase in value more rapidly than others). There is a lot of land in Texas.
You are virtually guarenteed in the area you are describing to need a septic system (A spray system would work with the area you describe - builders price of around $7k, retail price of up to $12k should do a 4 bedroom home). Also look for water conditions, again you’ll most likely need a well ($6k-$10k depending on how deep they drill). Don’t forget to add those kind of costs to the lot - a city lot you can hook up water & sewage for a fraction of that, so you have to build that into the purchase price.
The guys who buy and make money selling raw land, are either buying for pennies on the dollar, or have non-public information on development plans in that area… good luck.