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Is Vacant Land a Good Investment?

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On the surface, from a pure appreciation standpoint at least, the concept of purchasing and holding a vacant lot of land seems appealing.  But is it really?  It’s a loaded question, because like most investment options, this one has its share of upsides and downsides.

Obviously the main upside is that land is almost guaranteed to appreciate over the long haul.  The reason is simple: supply and demand.  In other words, our planet’s continuing population growth will increase the demand for land, yet it is not possible to manufacture new land.  It is a limited supply.  And as we all know from Economics 101, when demand goes up and supply remains the same, prices go up.

Another upside is that you could make a nice windfall of cash if you are lucky.  Not lotto lucky, but more of a blackjack type of lucky.  That is, if you do your research and buy some land in a very careful and analytical manner, and the area eventually takes off, you could potentially sell your land for a huge premium over what you paid.

Unfortunately, the downsides clearly outweigh the upsides.  One disadvantage is that this investment will almost certainly take several years to payoff, and more likely 15-20 years or more.  That’s a long time to have your equity tied up, especially since you probably will not be making any income during this time.  This lack of passive income is a major downside, because it means that the expenses, such as property tax and possibly a mortgage, will probably need to come out of your own pocket.  Similarly, you will not be able to enjoy the numerous tax benefits available to traditional rental property investors, like the ability to deduct all of your expenses including mileage and property depreciation.

Another downside is that land investing is risky.  No matter how much homework you do on the front end, you can never be sure which direction any given area will turn.  So in a sense, land investing is akin to speculating or gambling.  And because of this inherent risk, land is much more difficult to get financing for compared to a traditional house.  And even if you could get a loan, you can expect to pay a premium rate for it.  Finally, for all of these reasons, land can be difficult to sell; it is much less liquid and as such you might get stuck with it for longer than you want.

The bottom line is that I would only invest in land if I had excess cash and a lot of assets.  It could be a good way to diversify your real estate holdings, assuming you can afford to pay cash.  But if you are just starting out or have a relatively low level of existing capital, methinks you’d be better served investing in actual investment properties.  Good luck!

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