When most people think of real estate investing, they think of it in terms of commercial properties, such as office buildings or a residential rental property. While there's definitely money to be made from investing in physical structures, land is an equally valuable resource if you want to add real estate to your portfolio. There are various ways to invest in land, but it's important to understand what's needed to keep a land deal on the right course before you tap into this asset class. (For more, see ​Exploring Real Estate Investments.)

Identify Your Goals

Land investments can take many different forms, and it's important to make sure any deal you're considering is aligned with your overall investment strategy. If, for example, you're interested in producing a steady cash flow, you'd want to steer away from something like timberland investments, which only produce income when the timber is harvested. Investing in farmland, on the other hand, may yield a consistent stream of income if you're able to lease the land to an individual farmer or agricultural corporation. (For more, see There Are More Ways To Invest In Land Than You Think.)

You also need to have a clear exit strategy. Purchasing a piece of land for the sole purpose of leasing it for commercial or residential development, for example, usually entails a longer commitment of time, and it's not likely to produce a return on investment right away. Even if you're interested in selling the land rather than leasing, you could still be looking at a longer holding period if you're trying to find a developer to buy the property.

​How to Vet a Land Deal

Like any other investment, it's important to do the appropriate amount of due diligence before sinking money into a land deal. When evaluating a land investment, there are some specific things to pay attention to:

  • Zonin​g. ​Where a piece of land is located and what it can be used for are among the most important considerations for investors because these fundamentally shape your investment strategy. For instance, a piece of land that's zoned for residential use only wouldn't be suitable if you're interested in constructing an office building. Even if the price for a plot of raw land seems right, you have to weigh how much value you stand to get out of it over the long term.

  • Utility access. Whether you need them right away or not, access to public utilities, such as water, sewer, gas or electric service is a must if you plan to build on the land or lease it for development. If a land investment doesn't already have these features, you need to determine whether it's possible to obtain them and how much doing so will cost.

  • Market value. ​Sale price and market value are two different things. It's important to understand what a piece of land is actually worth before you invest. Getting a professional appraisal is helpful but not foolproof since pinning down market value to 100% certainty is difficult. Taking the zoning and surrounding area into account, as well as the larger local market, can steer you closer to an accurate figure.

  • ​Road access. ​Owning a piece of land does you no good if you can't get to it. If the area surrounding a land investment is privately owned, you need to ask whether road access can be made available if it isn’t already. This may entail paying for an easement, a cost that needs to be factored into the value of the investment. Make sure access is settled before you buy.

  • Maintenance and improvement costs. The purchase price may be your primary focus, but it isn't the only cost associated with a land investment. You also need to factor in property taxes and any expenses related to make the land usable. For instance, you may need to clear trees or remove items that have been dumped on the land. All these costs must be balanced against any income you expect the land to generate.

Managing Land Investments

Managing land investments is different from tracking the performance of stocks or mutual funds. Again, this all goes back to how you plan to use the land. If your interest lies in land speculation, for example, you're likely to be more tuned into the market since profitability is based on how developers drive demand. While speculation is riskier than other land-investing strategies, it also offers the potential for better returns. However, it requires you to keep a closer eye on market fluctuations than you would with something like a timber or farmland investment. (For more, see Uncover The Next Real Estate Hot Spot.)

If you prefer a more passive approach but plan on leasing the land out, you may need to hire someone to manage the land for you. While that eliminates the stress of having to deal with tenants or developers directly, the property manager's fee does add to the cost of your investment.

​The Bottom Line

Investing in land can be highly lucrative, but it's not the best choice for every investor. Take the time to research the potential pros and cons of a land deal and weigh the costs against what you stand to gain. This will give you a better idea of where land fits into your overall investment strategy.

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