A case for raw land investment
February 8, 2024 | Posted by: Chad & Patty Southwell
Real estate investors traditionally have sought residential rental properties as a means to add assets to their portfolio. While this is a long term plan, it has served many well. Rent is set to cover the mortgage and taxes, tenant essentially pays for the mortgage, at some point the rent is making a profit as the mortgage reduces and the equity slowly increases. Sounds like a no-brainer.
Here's the catch, rate and tax hikes may put the property owner in a position where the debt is not fully covered. These investments are not passive, they require a regular injection of cash by way of repairs and updates. You could also run into tenants who damage and or default on their payments, leaving the landlord footing the bill. As if that couldn't get worse, cash for keys is a trend where delinquent tenants are demanding owners pay them to leave the property.
So although it is a great concept when it runs smoothly, it can be a nightmare when it does not. If your goal is to hold assets in a corporation to increase your worth and wealth, consider instead parcels of raw land.
Rural raw land on the other hand is inexpensive in price and taxes, has no maintenance, no insurance requirement, and no hassles. The carrying costs are minimal. An investment portfolio containing inexpensive plots of land do not pay for themselves but they don't also have expensive surprises. This is a commodity that is a safe bet in an uncertain economic market. Additionally a beautiful forest lot can offer personal enjoyment and leisure.
Land financing traditionally ranges from 20% to 50% downpayment, depending on the credentials of the applicant and the location of the lot. The rate is also much higher than standard residential financing.
Consider the following when looking for a rural lot:
- zoning for potential residential build;
- access to hydro (if that is important);
- environmental concerns or restrictions; and
- right of way or title issues.
You want to be sure the lot is as versatile as possible to attract a potential builder. In an era of population growth and housing scarcity, a portfolio of raw land is a forward thinking investment.
