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What A Novice Investor Needs To Know About Investing In Land For The First Time

By Jamie Richardson | January 4, 2021

When it comes to investments, real estate remains king with 35 percent of Americans ranking real estate as the best long-term investment option, according to a Gallup Poll. With 36 percent of Americans living in rental properties, rising land prices, and more businesses seeking commercial spaces, the payoffs of investing in real estate are lucrative. In fact, the value of farmland has reached record highs this year. With over 39 percent of American farmland rented, investing in land can be a great and versatile source of income and an inexpensive investment to get you started in real estate investment.

Assess Your Return Income Streams Before Purchasing

A common misconception about investing in land is that it earns no returns if it is raw land. On the contrary, investing in raw land provides a wider range of options for income generation including owner financing, farmland rental, timber cultivation, or cattle ranching investments. However, if you elect to rent out your farmland, you should be aware that competition is rising. In the Midwest, almost 50 percent of farmland is owned by residents who are not farmers themselves, according to data released by the Department of Agriculture. For instance, in Iowa, 50 percent of farmland is rented by non-farming occupants and 25 percent has been owned by the same owner for 40 or more years. This indicates the pursuit of long term returns for most landowners.

If you prefer long-term returns as a land investor that helps to narrow your potential income stream choices when investing. However, if you are after immediate returns, you are better off considering what income sources are available to you. Is the land you are considering good enough to build on immediately? Can you finance renovations and building work? If not, you may be able to gain rental or leasehold income in the immediate future. 

Plan For The Cost Of Additional Land Taxes

You are liable to pay taxes on your investment even if you have not begun to generate income from it as yet. If you resell your land, the sale will be treated as a capital gain or loss. If held for less than 1 year, the land would be classed as a short term capital gain and taxed using ordinary income rates of up to 37 percent. If held for more than 1 year, the land would be classified as a long-term asset and gains would be taxed at up to 20 percent, according to the Tax Policy Center. Also, you will be liable to pay property tax for the land from the time of purchase, even if no economic activity has commenced on the premises. Getting ahead with your tax planning for real estate helps.

In some states, you may also be able to access tax breaks to help with the cost of ownership. For instance in Texas eligible landowners can get a wildlife exemption license. This means eligible Texas land investors can have their land valued at lower agricultural rates, regardless of whether there are ranching or agricultural activity ongoing on the land. With the exemption, investors and landowners can end up paying less than $200 in property taxes annually.

Location And Quality Impacts Your Cap Rates

A key part of making any investment is looking out for the markers of a good investment. It is no different when it comes to land investments. While a plot of raw land may seem like a good deal financially, investors should also look out for details like whether the ground is solid enough for building plans (either yours or your future tenants) and access to amenities including water and transport links. If you plan on leasing it out to commercial businesses or industrial tenants, these will factor in heavily into how attractive your location is on the market (and the price it can command).

Investors should also factor in the location of the land when considering the cap rates of a land investment. Cap rates refer to the yield of an investment and its potential risks. In this case, investing in farmland can show lower cap rates thanks to less elastic demand. This is because the use of the land for cattle ranching and crop production are all essential production sectors that have consistent demand in the U.S. Besides, the recent push to buy local produce has helped to sustain this demand, reducing the pitfalls of investing in farmland. Similarly, if you are thinking of investing in land for real estate development, consider market trends on rental properties in your area of interest. There is a critical shortage of rental properties in the U.S- more so in certain cities. Use this as a guide when choosing the location of your land investment.

As a novice investor, any investment may seem daunting at first. Land can be a lucrative and worthwhile investment if approached with the right tools and research. As prices in the housing market continue to soar, investing in raw land can be a cost-effective and unbeaten path onto the property investment ladder- with a wider range of options. However, keep in mind that with a more open playing field come larger risks. Being prepared as a land investor is the only way to get ahead of them and make it a success.

Jamie is a 5-year freelance writer who enjoys real estate. He is currently a Realty Biz News Contributor.
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