investor would undertake to make any kind of purchase of
investment land, they would obviously wish to know as much
as possible about it, and the context within which they are
making the investment land decision.
The Core Elements of Land Investment Feasibility
- Land Location
- How to Buy Land
- Land Features
- Investment Timing
- Opportunity Costs
- Community Acceptance
- Single Lot Investments
- Residential Lots
- Speculative Lots
- Lease vs. Resale
- Building to Suit
- Acreage for Resale
- Evaluating Land
- Land Promotions
- Land Bankers
Primarily, land location determines its potential future
growth in value. Although some enterprising promoters have
earned large profits from the sale of parcels of relatively
isolated building land, well-situated property is more
likely to increase in value.
For instance, land lying within a three-mile area on
either side of a major highway connecting two neighbouring
communities is almost certain to increase in value over
time. Generally, communities tend to grow toward each other,
developing increased demand and higher values for
intervening properties. And, as a rule, the closer to the
highway the land is situated, the higher its
Similarly, the purchase of raw acreage at the periphery
of a community by an investor who wishes to hold the land
for appreciation requires an educated prediction of the
direction in which the town or city will expand. An
incorrect estimate of future growth patterns will result in
the investor's waiting longer for profit realization. And as
the waiting period increases, the time value of money
affects the average annual rate of return.
This relationship of location to value is equally
applicable to single lots and large tracts of land. For
example, a lot purchased on a major arterial street in
anticipation of future rezoning for a more intensive use may
prove to be an extremely profitable investment if the
neighbourhood grows in that direction.
The reverse is also true.
Another example would be a lot that is located on the
exterior boundary of a subdivision and that overlooks a
large, vacant parcel of building land for sale. If the lot
is to be used for the construction of a home, then the
development of a shopping center, office building or other
commercial activity on the larger parcel may diminish the
How to Buy Land
When seriously considering whether to buy land or not,
you will make a decision based on all of the information
available to you and those experts who advise you.
Assuming for one moment that you do decide to buy land,
and instruct your solicitor to draw up the contract, they
will amongst other things conduct the necessary legal
searches. These searches will include an examination of the
possibility of future developments directly affecting your
plot. It is certainly a good idea to make yourself aware of
the possibilities before buying land, if only to save
yourself wasting time and effort with a site that turns out
to be impractical or undesirable.
For example, someone just about to buy land in an area
where a road-widening scheme is being planned or a new
by-pass being considered, or where land development is
about to take place to build an industrial estate, would be
well advised to look elsewhere.
The planning department of the local authority will be
well-placed to advise you of any planned developments before
buying land. In particular, you should ask them what "use"
the surrounding land has been designated, and whether or not
there are plans to change this status. With an accelerated
rate of house building looking set to start soon in the UK,
there may well be new highways planned close to your
The local highways department have maps and details
showing approved road schemes and those under consideration
as proposals. You may even be able to get access to
information about other planned schemes before they become
Before you buy land, take steps to protect your
investment. As well as the local authority, before you buy
land, you can talk to the local shop-keepers and also the
neighbours. This has the advantage that you might also get
to hear about ideas which have yet to be formally proposed.
Investment Land Features
The physical features of vacant land, such as topography
and soil composition, are as important as location in terms
of future profitability.
A parcel of land's physical features may be economically
advantageous to one owner and disadvantageous to another.
For instance, sloping foothill land is inefficient for
farming but desirable for high-priced homes with attractive
views. Likewise, unimproved acreage near a large city may be
less useful for cattle grazing than for development as a
suburban bedroom community.
Purchasers of single lots within a city must also be
aware of the physical characteristics of their land. A lot's
location, contours, drainage, soil quality and rezoning
potential affect its value.
Interior subdivision positions are essential to the buyer
of a house lot, while railroad tracks and highways are
significant features of an industrial parcel. Retail and
office developments require access to major traffic arteries
with high traffic counts, while apartment and mobile-home
dwellers seek public transportation facilities and
Land Investment Timing
"Buy low and sell high" is axiomatic to any investor
seeking a profit, and proper timing has a great deal to do
with both of these accomplishments.
Timing is a particularly important factor in real estate
investment because, by their very nature, these investments
are long term. In fact, real estate is often considered to
be a non-liquid investment. Often, it is easy to buy real
estate but quite a bit more difficult to sell it; in some
unfortunate instances, it can become impossible even to give
Land speculation requires a greater awareness of timing
than many other real estate investments, because most land
does not produce income during the holding period. It is
held by the investor pending a rise in value. The longer
this interim holding period, the lower the investment's
annual yield will be.
In addition to the land's initial purchase price, the
investor must make cash expenditures for mortgage payments,
property taxes and improvements to the land. Unless the
property can be leased for some income-generating activity,
vacant land requires constant financial support during its
Depending on a lot's location and characteristics, some
owners will seek to minimize their holding costs by renting
their properties as parking or used-car lots during the
waiting period. Owners of larger parcels have found it
expedient to develop farm or ranch operations while waiting
for the property to appreciate in value.
Leasing the land to tenant-farmers on a profit-sharing
basis will often produce enough tax-sheltered income to
carry an investment.
Investment Opportunity Costs
Whereas mortgage payments and property tax cash outlays
during the holding period are fairly obvious, opportunity
costs for the equity invested in the land development are
all too often ignored.
While the interest paid on a debt can be easily
identified as a cost for maintaining the investment, the
interest not earned on the cash invested in the property
must also be included as a holding cost. The rationale for
this practice is based on the present-worth principle. If
this money were invested, it would generate a profit.
Therefore, the money not earned on the capital invested
should be considered as carrying costs.
Land development speculation requires a greater awareness
of timing than many other real estate investments, because
most land does not produce income during the holding period.
It is held by the investor pending a rise in value. The
longer this interim holding period, the lower the
investment's annual yield will be.
An investor in vacant land must become acutely aware of
the legal and political attitudes of local governing bodies. Local governments may have a direct effect on the future
development of a specific parcel of self build land. Some
communities have passed growth management legislation that
requires developers to have their infrastructure (streets,
sewers, sidewalks utility lines, etc.) in place before they
offer their properties for sale.
Others have raised other barriers to development. For
example, if a community practices a no-growth policy, it may
be difficult, if not impossible, to secure the cooperation
necessary to have subdivision plans approved and/or
necessary utility services installed.
The future value of self build land often depends greatly
on the availability of gas, electricity and sewer services.
Some communities control their growth by refusing to issue
permits for the installation of these utilities.
Because a local moratorium on gas or sewer installations
can destroy the timing strategy for a particular
development, an investor in land should carefully select
those parcels that can be developed with as few potential
difficulties as possible.
In the long run, growth management may result in
ever-increasing prices for developments and serious
shortages of land for housing.
Single Lots of Investment Land
The opportunities for single lots of investment land
include those individual parcels purchased for residential
construction and those that have the rezoning potential for
more intensive, and therefore more profitable, uses.
In the first instance, the investor acts as a developer,
albeit on a small scale. In the second, the investor is a
speculator seeking to profit from the gain in value of the
Residential Lots of Land
Many people purchase a lot in anticipation of building a
self build house on plots of land for sale on it in later
By acquiring a home site at current costs, such a buyer
hopes to profit from its growth in value over time. Simultaneously, many of these buyers, unable to purchase
a lot for cash, enjoy the opportunity to make affordable
payments over time so that the debt on the lot will be paid
in full prior to construction. The free and clear land then becomes the tequity
necessary to secure a mortgage on the building self build
Speculative Investment Land
In addition to residential lots purchased for future
use, investors also buy strategically located vacant lots in
anticipation of a rise in value and profitable resale.
Generally, these speculative lot purchases are based on
the possibility of a successful rezoning of the property for
a more intensive use than single-family residences. Included
in this inventory are lots physically suited for multifamily
apartment projects and office structures as well as for
commercial and industrial developments.
Successful rezoning requests are based largely on the
subject property being located in an area of use compatible
with that being sought by the property owner. Good
land-control practices usually prevent any spot zoning,
require the applicant to prove conformity to the general
land use plan and follow adopted pollution-control
Rezoning activities are sometimes costly and time
Any rezoning proposal requires the satisfaction of
numerous individuals who hold vested interests in the
outcome of the proposed change, as well as the approval of
the community's planning agency.
Any objections by adjoining property owners and other
affected persons, sometimes expressed eloquently and often
vehemently at public hearings, must be overcome by the
applicant. However, the rewards are usually worth the
efforts required to obtain rezoning.
When purchasing vacant lots with possibilities for growth
in value, an investor must make a careful examination of the
community to identify potential areas of expansion. Once
these neighbourhoods are discovered, a meticulous search
should be made to discover those particular vacant parcels
of land sales with rezoning potential.
Lease vs. Resale
It is important for investors who purchase building
plots for sale to carefully evaluate their personal
financial positions before actually selling. In fact, it may
be more advantageous to lease, rather than sell, the
A lease develops certain advantages for both the
landowner and the tenant. The owner benefits by securing an
income stream into the future. In addition, at the
expiration of the lease, the reversionary rights to the Plot
Sales are retained, as well as any improvements made thereon
by the tenant.
Long-term land leases also provide the landowner with an
asset-the lease-that can be capitalized on. By pledging the
lease as collateral, the landlord can secure cash from a
lender- tax-free cash that can be used to purchase
additional investments. Thus, the landlord continues to own
the leased land and can expand the investment portfo- lio
The primary benefit to a land-leasing tenant is leverage:
the leasehold interest acquired under a long-term land lease
can be pledged as collateral for a mortgage to construct a
With a loan sufficient to pay for the costs of
construction, the developer may be able to leverage 100
percent and avoid investing personal funds in a project. In
addition, the rent paid by the tenant for the use of the
land is considered an operating expense in the year that it
Thus, by paying rent on land rather than owning it, a
tenant is effectively gaining the benefits of "depreciating"
the land over the life of the lease. Remember that plot
sales is not specifically depreciable.
Building Land to Suit
There are a number of ways to look at the suitability of
a building plot of land for development.
In an attempt to convert a vacant lot into
income-producing improved property, owners sometimes
advertise that they will proceed with land development and
construct a building on the lot that will satisfy the
particular requirements of a potential tenant.
On the signing of a long-term lease and the construction
on the building land, the landowner becomes a landlord in
the traditional sense. At the expiration of the lease, the
landlord continues to own both the land and the vacant
building, which can be rerented or converted to a new use.
The difference in economic positions between an owner of
a vacant parcel of land and an owner of a vacant building is
of critical importance to an investor in deciding whether to
initiate land development and begin construction.
In the first instance, the property owner pays relatively
low property taxes and faces no continuing
In the second, the owner's taxes are higher because they
are based on the value of the building as well as the land.
In addition, the empty building requires continuous care,
repair and protection. All of these factors must be borne in
mind when considering land development.
The economic position of a building land owner is more
vulnerable, so the landowner who solicits a tenant on a
build-to-suit basis will negotiate rather firmly for a lease
that will completely satisfy investment requirements over
the term of the initial lease period. To provide adequate
protection against the increased risk, the rent will have to
be arranged to develop an acceptable return on the
investment as well as a timely return of the investor's cash
As a further precaution, a build-to-suit landowner
participating in land development will generally avoid the
construction of a single-purpose building if at all
possible. Such buildings are usually difficult to re-rent
and are expensive to re-model.
Nevertheless, many single-purpose buildings for fast-food
franchises or 24-hour minimarkets are being constructed for
strong, AAA-rated national tenants.
Investors in raw acreage can be classified as either
speculators or developers, as can purchasers of small lots.
A larger land parcel can be bought for resale as a single
unit or for subdividing into either improved or unimproved
lots. In the former situation, the investor acts as a
speculator, holding the land for growth in value, then
selling the tract intact.
When raw acreage is subdivided, the investor who sells
the land in small parcels after few or no improvements have
been made is speculating in land promotions, whereas the
subdivider who improves the raw acreage with roads, sewers,
water, and other utilities and amenities before selling lots
is a land developer.
Land is often worth more as one wholly integrated and
cohesive unit than it is as a number of individually owned
separate parcels. This concept is called agglomeration,
plottage or assemblage.
To apply this principle of ownership and value, a major
farming or ranching enterprise would seek to control as many
adjoining acres as possible to attain more efficient
Similarly, the total of the individual values of lots in
a block could be worth less than the entire block as a
single site for a large shopping center. In this case, the
value increase is a function of a change in use as well as
the efficiency of single ownership.
Plottage can have a reverse effect on the value of
acreage for speculators and developers.
When quantities of land are accumulated for investment
purposes, the total value of the individual smaller parcels
is usually less than the value of the total property when
finally acquired. However, if the speculator or developer
decides to subdivide this wholly owned property, the sum of
the sales prices of the individual lots often greatly
exceeds the value of the property as a single unit.
This concept will be examined in the next chapter in a
discussion of conversion of rental apartments into
Acreage for Resale in One Unit
In regions of the country where the greenfield land is
fertile, very little acreage speculation takes place.
Productive land is usually held by individual farmers or
ranchers. On the death of the owner, the land is passed to
family heirs. Speculation in acreage is most common in areas
of the country where the land is relatively unproductive.
The value of land is not based merely on its productive
capacity. Depending on intended use, location can become the
key factor in determining value. Land speculators are not as
concerned with soil fertility as they are with locational
advantages or disadvantages that will affect the future
desirability of the land for developers and/or builders.
Accessibility to nearby major highways and communities;
availability of water, gas and electricity; and proximity to
natural and man-made amenities, such as nearby lakes, woods,
golf courses or ski slopes all increase the profit potential
of investments in raw acreage.
Speculators in unimproved greenfield land for sale range
from the small investor, who buys 5 to 40 acres located on
the periphery of an expanding community, to the large
investment syndicates, which purchase thousands of acres to
hold for future resale. Regardless of the size of the
investment, however, the philosophy is always to buy right
to net a large profit.
Large profits are often less than they appear to be. For
example, throughout its holding period, raw acreage requires
the payment of such basic carrying charges as property
taxes, interest and opportunity costs. Although taxes on
vacant acreage are relatively low, the compounding effects
of opportunity costs must be included when analyzing the
feasibility of an investment in acreage. Remember, there is
usually no cash flow to provide offsetting income during the
years between purchase and sale.
Assuming a property tax rate at a cost of 1 percent per
year plus an opportunity (interest) cost of 9 percent per
year, the value of the land will have to increase at least
10 percent annually just for the investor to break even when
the property is sold. When an investor's desired profit rate
and an appropriate percentage ratio to cover monies needed
for the costs of a sale (for example, commissions, title
policy premiums, legal fees, income taxes) are added to this
10 percent rate, required annual increases in property value
of 15 percent to 20 percent are not unreasonable.
This rate of increase means that the property must double
in value every five to seven years if the costs of
investment plus a profit are to be earned. For example, even
if the value of the land increases 100 percent over a
ten-year holding period and the property owner sells for an
amount twice what was originally paid, the annual rate of
return would be only 10 percent (100% 10 years = 10% per
year). At a 10 percent value increase annually, the
investment may not yield an amount of return adequate to
cover both carrying costs and anticipated profits. Thus, it
is vital that an investor make an effort to identify future
value-growth patterns by carefully investigating trends in
local property values.
The evaluation of raw land depends to a great degree on
its future, rather than its present, use. Thus, an investor
must be able to predict the type of eventual use as well as
the time when this use will become feasible-not an easy
The most popular basis for evaluating land is the
comparative approach, whereby similarly zoned parcels of
greenbelt land that sold recently are said to establish the
value. This is after adjustments have been made for
location, size and date of sale.
A more comprehensive approach is advisable, because the
existing zoning of the greenbelt land may not be its highest
and best future use. The time value of money also must be
considered. Careful attention should be paid to an opinion
of future use by analyzing the area's demographics,
employment centers and traffic counts. This information
would form a basis for projecting the number of acres that
would be in demand for each use classification (i.e.,
residential, business, industrial and so on.
In addition, a careful forecast should be made of when
the property will be ready for development. The factors to
consider in this analysis include supply, demand,
availability, growth patterns and distance from existing
development. Some effort should be made to project building
costs and rents to estimate what a developer might pay for
the land in the future.
Finally, to derive the present value of the greenbelt
land, an appropriate investment return must be established.
When improved properties are being sold for close to a 10
percent capitalization rate on an all-cash basis, raw land
requires the investor to double this figure to account for
the increased risks involved. Thus, a 20 percent annual
return requirement should be applied to project the future
Many land-promotion schemes are the consequence of
speculation in raw acreage. The promoter buys a large tract
of vacant acreage at wholesale prices, divides it into
smaller parcels and resells these smaller, usually
unimproved, lots at retail prices to buyers scattered
throughout this, as well as other, countries.
These lots are marketed through various promotional plans
and advertising media. One of the more common marketing
methods is to invite prospective buyers to a free dinner
during which salespeople extol the virtues of the property
through lecture and film.
Often, these dinners are followed by an offer of a trip
to the site, with any costs for traveling reimbursed by the
promoters after purchase of a lot. Generally, the various
large companies involved in such land promotions follow a
format of marketing the individual lots as second, or
The financing designs of both the original purchase of
raw acreage by the promoter and the subsequent sales of lots
to individuals are the most important elements in this form
of real estate investment.
A purchase of land for use in a sales promotion usually
requires the seller of the raw acreage to carry back a
substantial portion of the sales price as an installment
land contract or purchase-money mortgage. Thus, after the
promoter makes an agreed-on cash down payment, usually about
5 percent to 10 percent of the purchase price, the landowner
will accept a lien on the acreage involved for the remainder
of the sales price. This balance is to be paid by the
promoter on some regular amortization schedule. Under a land
contract, the seller retains legal title to the acreage
until the terms of the contract are met, usually the
requirement that the balance be paid in full.
Most land-promotion property is sold to subsequent
small-lot owners with any underlying financial arrangements
left intact. As a result, each individual sale is made
subject to the lien of at least one existing encumbrance,
the installment contract or purchase-money mortgage between
the promoter and the seller of the acreage. The existence of
an underlying encumbrance poses a serious threat to the
purchaser of an individual lot if the promoter does not make
payments as required. The small-lot owner may be financially
hurt in a subsequent foreclosure of the master lien.
To offset this problem, most legitimate promoters will
secure a recognition clause in their original financing
agreement in which the vendor or mortgagee agrees in advance
that if the promoter should default during the term of the
agreement, the lender will respect the rights of subsequent
lot owners and honor their contracts.
Alternatively, a release clause may be inserted in the
land contract under the terms of which individual lots may
be released from the master lien after a certain agreed-on
percentage of its balance has been paid by the vendee.
The sales of lots to individual purchasers are generally
designed as installment land contracts. Most buyers of these
promotional lots make small cash down payments and the
balance is carried back by the selling company to be paid in
regular monthly installments. Frequently, the seller's
signature is not notarized, and, consequently, the contract
is unacceptable to the appropriate county office for
A promoter hopes that the initial sales campaign will
generate enough individual sales to quickly develop the cash
flows necessary to meet the required underlying contract
payments. Sometimes it takes a few years to reach this
break- even point, and the promoter must be prepared to meet
payments and operating costs with other funds. A promoter
can offset a cash shortage either by selling the individual
contracts secured through early sales, a process called
factoring, or by pledging these contracts as collateral for
a bank loan to meet operating expenses. Once a break-even
point has been met, however, continued sales will generally
result in substantial profits.
Because they recognize the complexities and possible
pitfalls for the consumer in this form of land promotion,
both federal and state regulatory agencies carefully
supervise such programs. All interstate land sales must
conform to the requirements of the federal government's
Regulation Z. The promoters must prepare and distribute to
all prospective lot purchasers a full disclosure report
describing the subject property and the complete financial
arrangements of the transaction. Many states require that
the promoter post bonds in amounts adequate to complete any
promised improvements to the land, such as roads, golf
courses, clubhouses and lakes, before granting the promoter
permission to market the lots.
Investment Land Bankers
Speculation in acreage places an investor in a somewhat
passive role while waiting for values to rise to the point
where profitable sales can be made.
On the other hand, development of acreage into
subdivisions requires an investor to play a more active role
in order to effectively market the inventory of lots. Often,
investors or builders purchase raw acreage situated on the
boundary of an expanding community, improve the property,
subdivide it and sell lots or build houses, apartments,
offices or shopping centers on the land.
A developer who improves raw land for construction
purposes and maintains an inventory of lots as a function of
this ongoing business is called a land banker. Besides the
purchase price of the unimproved acreage, the costs of land
banking include property taxes, interest, off- site and
on-site improvements, engineering, site development, plat
acceptance, sales commissions, insurance and costs incurred
because of timing constraints. The skills, risks and
responsibilities required of the land banker-developer make
this a very specialized segment of real estate investment.
To begin the development process, a land banker purchases
a parcel of raw land, usually 160 acres or more, and
prepares plats and maps of the property designating street
locations, lot sizes and the general plan for the entire
These plots, usually drawn by licensed civil engineers,
are submitted to the appropriate community regulating
agencies for approval of design and zoning. After meeting
local governmental requirements, including submission of a
full environmental impact study, the subdivider will proceed
to physically prepare the land and sell lots to both
individuals and builders.
Depending on the amount of acreage involved in the
development, the resulting subdivision may follow the style
of surrounding neighborhoods or may acquire a distinct
character of its own. Many large-scale developments include
land designated for the location of a school and/or a park,
including swimming pool, tennis courts, clubhouse and,
perhaps, even a golf course.
Most well-planned subdivisions include a set of
restrictions itemizing the type, design and quality of the
improvements to be constructed on the lots therein. These
subdivision restrictions are recorded and become covenants
that run with the land so that each lot buyer and subsequent
homeowner is required to observe these restrictions. Their
enforcement becomes the responsibility of the neighborhood
association formed after the project is completed.
Restrictions are designed to create an economic and
physical homogeneity within a neighborhood, important for
maintaining property values. By restricting lots to
residential construction, incompatible uses are eliminated.
By requiring a minimum square or cubic footage for each
house, an economic floor is created, limiting the
neighborhood residents to those who can afford to purchase a
home of the specified size.
Many builders do not have the financial capacity, the
expertise or the inclination to become involved in land
development. Such builders prefer to leave this type of real
estate investment opportunity to those with proven skill in
the field. Smaller builders are usually content to purchase
lots from a developer-land banker, either singly or in
packages of from 5 to 50 lots, depending on their needs. The
prices paid for these lots reflect the developer's cost of
acquisition, preparation and desired rate of return on the
investment. For smaller builders, this technique of land
acquisition is much less costly and demanding than an active
entry into the field of subdividing.