Land is a valuable resource best known for its potential to be a lucrative investment. But before it becomes a source of steady income, it has to be developed first.
Here are several of the finer points of developing raw land.
The process
Know the steps to take in developing raw land below:
Find out the land’s feasibility
Doing this minimizes the uncertainty of developing land without knowing the estimated returns resulting from this undertaking. For a reliable estimate, you can ask for the help of a real estate professional to make sure that all crucial factors will be considered in the land’s development.
Research on the land’s zoning
What is the established purpose of the land in your particular zone? This is the question that should be answered when looking into the background of the land’s local zoning. The area may be part of a commercial development or a residential environment. Depending on the zone that your land is on, you’ll have a clearer idea of the types of structures that you can build on it.
Secure financing
In applying for a mortgage to develop your raw land, note that most lenders will only account for around 80-85% of the total cost of your project. The terms for financing may also vary depending on the plans you have for the land.
With this in mind, it’s best to focus on the loan-to-cost ratio. This weighs the loan to be taken out over the overall expenses to be used for the development. It’s seen as a measure of leverage that indicates the proportion of debt in the financing of a project. The higher the leverage, the riskier the investment.
Begin the development
After you have secured your loan, you can then proceed with its development. It all starts with horizontal development, meaning preparing the land for the eventual rise of structures on the property. This includes grading the land for roads, curbs, and utilities.
Once the foundation is set, building structures from the ground up is next. Do take into consideration the timing of construction. For example, building an apartment while the housing inventory is high is not cost-effective.
Market the land/property
Marketing the property will be similar to the way traditional properties are being sold. This includes conducting research on the neighborhood and the state of the real estate market and finding ways to attract prospective buyers or tenants. This is a task best accomplished with the help of real estate professionals with the necessary specialization.
The benefits
Investing in raw land has its benefits, major of which is that you buy it at a relatively low price, develop it, then sell it at a premium. Other advantages include the following:
- Most investors look for properties that they can immediately use or live in. This leaves more elbow room in terms of competition for raw land.
- Raw land remains valuable even in times of economic uncertainty, mainly due to its great potential for appreciation and its nature as a hard asset.
- If you’re selling your raw land, know that many banking institutions may be hesitant to lend money to buyers for this. You can take matters into your own hands and offer selling financing options. This can be done by lending the capital then charging the buyer gradually at higher interest until it’s fully paid.
- Depending on zoning codes, raw land can be developed into residential, commercial, or industrial properties. This gives investors the freedom to chart and develop their own investment plans.
