As the famous Mark Twain goes, “buy land, they’re not making it anymore”. There is a simplistic truth in that statement and land investments do seem to have made plenty of people wealthier than before they owned it.
The obvious question that many investors tend to ask would be is land a good investment? But before you can answer that question more accurately you have to first qualify what type of land investment you are talking about, as there are probably more different types of land investment that you first thought.
We will also take a look at some land-related investment options that are available through investment products such as ETF’s and ETN’s, where you are not directly acquiring the land yourself.
The following list are the most popular general categories of possible land investments that are available.
- Residential and Commercial development land
- Livestock and crop-producing land
- Timberland & commercial woodlands
- Recreational land
The most common types of property investment for many of us are residential or commercial land and there are numerous development opportunities and scenarios where deals can be structured to fall in line with investors goals as well as any relevant capital and time constraints that are applicable to each specific venture.
Residential and commercial land development investments are primarily meant to provide you with a return on your capital by using the land to create a development that adds value and is subsequently sold on at a profit, if it all goes to plan.
Any investors who want to own and occupy the land for their own benefit would not therefore look to get involved in a commercial or residential deal where ownership is almost temporary and the land is being used to generate a profit rather than provide somewhere for you to live.
Rules of engagement
Any investor who is considering a raw-land purchase will need to be aware of the basic rules of engagement relevant to this type of property speculating.
Investing in land that has yet to be developed is speculative and will not generate any income. This means that the profit will have to come from achieving a higher sale price than the amount you paid for the land.
It is interesting to note the case of farm real-estate to understand the risks attached to investing in raw land of any kind.
If you took out a farm real-estate loan in the U.S about 12 months ago, the percentage rate for a fully amortized loan was in the region of 5.9%. Working on this rate as your guide, the land would have to increase in value by this amount each year, just for your investment to break even.
If interest rise beyond the initial level of the loan at some point in the future, this will only serve to increase the challenge of making the investment pay. This illustration is not intended to suggest that raw-land investment is a bad idea, as there are plenty of other factors to consider, such as your tax situation, but it does show that some land investments are not an instant path to profit.
Commercial woodlands have gained a good reputation in recent years as a place to invest some of your surplus business cash.
The value of commercial woodlands has been increasing and depending on your circumstances, there are some tax advantages for investors.
In the UK commercial woodlands attract 100% Business Property Relief after it has been owned for 2 years and there is no inheritance tax liability provided this condition is met.
A number of investors consider timberlands as a good vehicle within a diversified portfolio and in the past, the price of these holdings has had a negative correlation with stocks and bonds, which means that in theory, timberland prices rise when the stock markets are underperforming.
The idea of investing in a vineyard has romantic connotations for some investors, but you should always approach this type of land investment with a degree of caution and realism.
It takes a good ten years to establish a vineyard, so if you are investing in a new venture, you should not expect to see a quick return on your money. In order for a vineyard to be profitable, it will probably need to produce at least 40,000 bottles per year, so bear these figures in mind when looking at a possible venture or investment proposal.
One way of looking at recreational land as an investment, is the fact that the land may well appreciate in value whilst you are able to enjoy its various benefits, such as fishing or camping.
Recreational land does not offer the chance of a big uplift in value in the same way that land being developed for profit could, but it may be suitable to your lifestyle and your financial situation.
You can also participate in a suitable scheme to profit from land without actually owning it directly.
There are a number of Agricultural ETFs traded in the US for example which might be suitable as an alternative investment and some are highly specific such as a wheat fund, which allows you to potentially profit from the sale of crops being produced on agricultural land, through an ETF.