I have noticed that many investor fail to ask themselves the three most important questions before investing in any piece of property. Usually, they get emotionally involved in the imaginative aspects of the property – they see it as a wonderful homestead or a refuge from their busy lives. However, before jumping in feet first you should ask yourself these three essential questions:
1. Property Taxes & Liability
You never want to get stuck with a piece of property that could become a liability for you and not an asset. Land can be a great long-term investment but it can take many years for that piece of property to appreciate in value and each year you have to pay the taxes on that property. If the taxes are so high that it’s going to become a financial burden and as a result you may one day have to liquidate that piece of property at a loss, then the whole purpose for buying the property has been wasted. I love rural property simply because of its natural beauty, the open spaces, the privacy associated with it and the lack of restrictions. In addition, I can hold on to that piece of property for many years without it becoming a financial burden simply because rural property typically has a lower tax basis than an already improved piece of property.
2. What is compelling about this piece of property?
What is so compelling about this property that if I had to sell it tomorrow to a loyal client they would immediately find the land compelling because of its attributes. Does it have mountain views, or is it near a lake or a major body of water? It is close to a large city that is expanding in population size or does it have a variety of amenities that many people would enjoy? Is there a creek running through the property or is it in the path of economic growth that could bring employment and prosperity to the area? Could people farm this land or is the terrain a perfect place for recreational use? So to sum it up – don’t invest in the property simply because it seems like it’s a great deal. If price is the first and only consideration, you may be making a huge financial mistake because if there is not something compelling about that property to another buyer you could simply end up stuck with it.
3. How do I know I’m not overpaying for this piece of property?
Determining what you should pay for a piece of property is often trickier with raw land than it is for a home or apartment building. With housing it is relatively easy to look up comparable sales in the neighborhood and see what most people are paying and what the price range is. However, with raw land there are so many factors that come into play that each piece of land needs to be evaluated on its own merit. Typically, you need to first determine what the best uses for the property will be. If you are planning on building on the property what are the costs associated with that project? How much would it be to install a well? Do you need to blade roads? How much to tap into power or go solar? What will that cost? Any improvements you make to the property need to be factored in to the total cost of the investment. Then, you need to contact local realtors and find out what similar pieces of property are selling for in the same area. Maybe another seller has already made the improvements that you are interested in and you can get it for a better price and fewer headaches. After you do this important analysis, you will be able get a good idea of what you should pay for this piece of property. If the seller is not realistic about the price, let them know during your negotiations why you think the property is overpriced before you make a lower offer. Craig’s List is another good place to gather information about land prices in your area so you can see what people are selling their lots for on a for sale by owner basis.
Asking yourself these 3 important questions before making any land investment is going to save you money and is going to make you a much more sophisticated land investor.