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Pros & Cons of Purchasing Undeveloped Land

Pros & Cons of Purchasing Undeveloped Land

Posted by Builder Finance Team Member on July 09 2020

When it comes to real estate investing, many investors choose to purchase existing properties as income generators, be they single family homes or multi-unit dwellings. Alternatively, they may purchase land with established infrastructure that is already set up for residential construction. Yet a third option is purchasing undeveloped land. Undeveloped or raw land is a parcel of land that hasn’t been cleared or dug for construction, has no existing buildings, and no connections to utilities. This type of investment has definite pros and cons for the investor, and we’ve outlined some of those below.

Pros:

Cheaper

Generally speaking, undeveloped land is going to be cheaper than developed land of equal size because there is nothing on it to add value. Keep in mind that property taxes also tend to be lower on undeveloped land, and the fact that there are no utilities in place also helps keep the price down.

Flexible

Because undeveloped land is just that, what and how you choose to build on it is open to possibilities, as long as you stay within the zoning laws. Depending on the size of the land, options may include building one or more single family homes, a multi-unit residential project, vacation rentals, or leasing the land to farmers or ranchers just to name a few.

Another flexible aspect of purchasing undeveloped land is that it is not unusual for investors to buy it without having to physically set foot on it. Thanks to Google Streetview, satellite images, and of course photos and videos, if you’re far away from the property, you can usually close the whole deal remotely. And because nothing is on it, there may not be a need to “get a feel for it” the way you would when buying a home for yourself. The “feel” will come once your land is developed!

Easy To Buy

More often than not, the process of buying undeveloped land is very straightforward. In fact, most undeveloped land is purchased with cash, allowing you to have full ownership without needing to worry about interest rates and a mortgage. And many banks and lenders don’t offer mortgages on undeveloped land at all. The good news is, once the land is yours and you’re ready to build, you can always apply for a construction loan which can be converted into a traditional mortgage.

Cons:

Permits and Approvals (Zoning)

How land is zoned directly determines what you can and cannot build on it, so this is something you should certainly research thoroughly if you’ve found a piece of undeveloped land you like. Don’t forget, one of the things zoning determines is how many lots you can place on your new piece of land, making a big difference in what you’ll be able to do with it and how much of a return you’ll get on your investment. Because it is undeveloped, there will be numerous permits and approvals that will need to be acquired (certainly more than for a developed urban lot) and this can result in a lot of waiting around. You’ll also have to deal with the local township on a regular basis to get the development of the land sorted out.

No Infrastructure

This goes in hand in hand with needing permits. Because your undeveloped land has no utilities like plumbing or electrical, all of this becomes part of developing the land. Will you connect your property to the municipal utilities? Will you have septic and well systems in place? Will any of the energy be sourced on site from solar or wind power? All of these are questions to consider and they add time and money to your project. And because the land isn’t developed, if it is large, you’ll also need to consider building roads and paths for construction crews to be able to begin work when the time finally comes.

No Immediate Cash Flow

While a piece of undeveloped land may be affordable and full of possibilities, the return on your investment tends to be long term. Without a way to immediately generate income from the land, any potential cash flow won’t be seen for a while. You will, however, still have property taxes to pay. This means that some clever thinking may be necessary. As real estate developer Dave Van Horn states, “without rental income coming in, you may need to get creative in order to cover the expenses. For example, you could sell parcels of the land or the rights to it (i.e. mineral rights, gaming rights, etc.), or you could find another use for the land in the meantime.”

Purchasing undeveloped land can be a great long-term investment. Understanding the good and bad that comes with it is the first step in learning how to make it work for you!

Topics: Land, Construction, Lots, permits, investment, cost, approvals, infrastructure, real estate, flexibility, raw land, undeveloped land

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