SUNMARK REALTY, INC.
Offices:
Bokeelia - Florida
PO Box 420 Pineland, FL 33945
Ph: 239-283-1717 Fax: 239-283-0173
Tampa -Florida
17427 Bridge Hill Ct., Suite D Tampa, FL 33647
Ph: 813-416-4254 Fax: 813-971-9679
Commercial - Investment
Land - Industrial - Office
(239) 283-1717 (813) 416-4254
RECOMMENDED ARTICLES
America's Top 100 Land Owners, (The Land Report, 2010).
Investing in land, (University Federal Credit Union, 2009).
5 good reasons to buy land, (Find Land Auctions Online, Aug. 15, 2009).
9 considerations when investing in land, (Find Land Auctions Online, July 21, 2009).
8 ways to cover your holding costs on land, (Find Land Auctions Online, Sept. 2, 2009).
Shopping for a swamp?, (REALTOR® Magazine, Aug. 2008).
Save for retirement by buying land?, (Kiplinger's Personal Finance, May 2007).
INVESTING IN LAND
Land has long been considered a purchase made by only the wealthiest of investors. While this may have been the case in the past, it simply isn’t the case today. Land is one of the most astute investments around, especially in these tough economic times when prices are at their lowest in a decade. Today's land market offers excellent potential for future appreciation and provides owners with an asset that can provide excellent versitility. Land has many tax benefits that owners/buyers can use to offset other income. Land can also offer enjoyment of use and ownership. When you purchase land, you're purchasing a tangable asset that becomes more scarce every year.
There are many different things to keep in mind when purchasing land. The answers to these questions will all be vital in finding the true value of the land you will be purchasing. Land can either be purchased to generate a cash flow such as crop land or commercial land leases or land can be purchased for long-term appreciation/speculation. Regardless of what route you take, basic fundamentals need to be followed:
1. Timing - Buy when the market's down and sell when the market's up. This sounds like an easy formula to follow. Timing though, is a concept that has tackled the most savvy developer or investor. The past real estate cycle has taught many in the land business a valuable lesson: if it seems to good to be true, chances are it is. Prices cannot outpace average living standards without imbalaces developing.
As a land investor, you need to be aware of the land market cycle in your area and also be aware of other investment markets that can affect real estate. The stock market has a direct affect on real estate as does the rate of inflation. When inflation rises and the stock market becomes stagnant, money flows into real estate. You want to follow market reports and advice from top land realtors to help guage where the market is and make your own sound decision from there.
2. Goals - Are you looking for cash flow or long-term appreciation/speculation? Generally you will use two different calculations for either investment. Cash flow properties will be evaluated using a cap rate or internal rate of return. Cash flow properties usually are farm/agricultural land out of the way of growth and rely on steady cash flows to be good investments. These types of investments do not rely on future appreciation. On the other end of the spectrum, long-term appreciaton/speculation type properties do not provide cash flow and can sometimes incur a substancial negative cash flow during the property holding period. Some of the best profits can come from investing in land in the path of growth or buying property in an area experiencing good appreciation. It's important to do your homework on these types of properties to maximize the long-term profit. An important rule on both types of properties is to keep your investment goals in check and don't hold out for greener pastures when it's time to sell.
3. Access - All marketable property must have viable access. Look for a property with existing highway access and plenty of road frontage. The better the road frontage, the more opportunity you have to take advantage of future appreciation. If your property is slightly off the main drag don't assume the City/County will grant access or lay in a road to your prospective property. Projected road access is often subject to change and traffic control is an absolute priority with most municipalities.
4. Utilities / Water Rights - Values can be directly affected by the availability of utilities or the water rights. For farm and crop lands, water rights are vitally important. Without water, crops will not produce and farmers will go elsewhere. This will directly affect your ROI or IRR. The same goes for raw development land or residential lots. The more utilities a property has available, the less money the end user or develper has to spend on infrastructure. This ultimately will increase your end sales price.
5. Zoning and FLUM (Future Land Use) - Zoning plays an important part in valuing any property. A property zoned commercial is naturally going to have more value than a property zoned rural residential or agricultural due to supply. The best chance of maximizing future profit is to purchase property with a lower current zoning, but with a future land use or municipal master zoning that is higher. This also limits your tax consequence during your holding period. Another good objective is to make sure that the prospective zoning specified for the property of interest has a sufficiently broad variety of inherent uses in order to maximize its marketability. Also be aware that municipalities and cities are reluctant to deviate from zoning master planned concepts. Just because you own a large parcel of agricultural land and want to develop a subdivision, doesn't mean the governmental agencies will agree.
6. Environmental Issues - Due diligence must be performed on any property larger than a residential lot. Don't assume non-developed properties are clean. Some farm related uses can pose significant contamination hazards. Other hazards can exsist from undergournd tanks or contamination from near by commercial/industrial facilities. Make sure any contract to purchase has a "subject to satisfactory environmental audit" clause.
Wetlands and environmentally sensitive areas can also add tremendous expense for future developers and can impede current and future development of the property. This should be taken into consideration when purchasing any property, including agricultural land.
7. Neighboring Properties - Neighboring properties can make or break your land investment. It's important to research the surrounding land zonings, companies and past environmental histories. It's a good practice to avoid purchasing residential property surrounded by other incompatable uses and vice versa. Also note that there are hundreds of brownsfield areas throughout Florida. These properties are contaminated properties that have yet to be cleaned up. Large farm tracts can also have environmental contamination due to large amounts of arsenic and other toxins used long ago in Florida to dip livestock in.
8. Supply & Demand - Supply and demand ties in directly with timing and your investment goals. It's important to note the amount of a specific property in a given area, especially for long-term investments/speculation. If an area lacks commercial properties, this type of property may be a good target if the price and timing is right and supply of commercial buildings is in balance.
Also note the amount of new housing being built in an area. Depending on the pace at which new construction is occuring, you can guage whether or not residential land or lots will be a good investment in the near future. If you're looking to purchase in an area where there are thousands of platted and vacant lots, you need to note the yearly absorption to estimate how long you may have to hold the property.
To summarize, investmenting in raw land can yield spectacular returns on equity if you do your homework. Land is an investment that's tangible and becomes more scarce every year. You can also lose a bundle if you guage the market wrong. The consistent winners in speculative raw land investment are those who are comfortable with the timelines involved, do their homework and stick to the basics. Even the most experienced developers can get burned when they forget these aspects. For informed investors speculative land investments can be a useful, valuable and entertaining part of a diversified portfolio.
Written by: Sage N. Andress, ALC, CCIM
