Trends in the land investment market are providing some interesting opportunities for investors…
Land is finite. Like any finite resource, land becomes more valuable when it’s scarce. Land in desirable locations can command tremendous prices and provide excellent investment returns.
By definition, land investors have a goal of making a profit by investing in land. But consider that land investors can have a variety of backgrounds and purposes, whether they may be individuals looking for property to build their dream home (and their nest egg), investors seeking a portfolio of parcels to land bank or real estate developers buying a site for their next project. The common goal is that these investors intend for the asset to increase in value, and for their land investment to ultimately be profitable.
Market trends can impact, and provide opportunities for, all types of land investors. So if you are a land investor, here are some market trends to watch:
Scarcity of Finished Lots
During the economic downturn, residential real estate development nearly halted. Banks stopped lending money for new development, builders and homeowners stopped buying lots and many developers and others in the housing industry went out of business.
Now that the economy is slowly improving and the housing market has grown, there is a high demand for developed – “finished” – lots that are ready-to-build for new homes. Many of the lots that were in the pipeline before the downturn, and that were in limbo during the downturn, already have been purchased by builders for new homes. But builders need more finished lots to meet the home buying demand, and there are investment opportunities tied to this trend.
What this means for land investment in the short term is that the market is seeing a significant increase in value for fully-finished lots. Look at infill, isolated lots and other opportunities that were overlooked by big builders who were buying large communities of finished lots. Likewise, investors may find opportunities in partially completed “zombie subdivisions” when they can be quickly finished and prepared for new homes. Investors that do some legwork, connect with a builder as a buyer in advance and help buyers clean up issues regarding a portfolio of unfinished lots will have good opportunities to make a quick return.
Slowing of Suburban Sprawl
Over the past decade, many cities have remodeled and revitalized downtown areas. With increased fuel prices and a desire for shorter commutes, along with lowered home costs in some urban areas, the nation has seen suburbanites heading back to town centers and walkable neighborhoods in infill areas. Pair downtown renewal with the fact that new home purchases in fringe suburban and rural developments were hit hardest during the housing downturn, and all of this has slowed the expected growth of suburban development.
Some journalists even have questioned whether this is the death of suburbs. We do not believe suburbs are dead, but they definitely have been growing slower and are being challenged by attractive development models that are different from the “typical” suburban, cul-de-sac community.
What this means is that land investors who are buying rural land in anticipation of future suburban development may have a longer wait to exit their land investment. On the other hand, buyers who just want a place to “get away from it all” in rural or far suburban locations may have more affordable options, as they are not competing with the retailers and residential developers that are eyeing land closer to metropolitan centers. As for the shorter term, you may want to look at infill parcels and evaluate land based on its proximity to popular city centers.
The flip side is that over the past decade there has been a major increase in the value of farmland. Because more crops are being used for bio-fuels and higher population growth is projected, it is expected that we will need to harvest a greater amount of crops from our dedicated farmland. In fact, during the downturn there even were cases where former farmland that had been sold for development was re-acquired by farmers at discount prices with the intent to put it back to use for crops.
Easing in Lending Options
Few land buyers pay cash; so lending institutions have a huge influence on real estate prices and the overall market. Banks and their loose underwriting practices played a major role in the housing crash. And after the real estate bubble burst and the financial industry was sent into turmoil, banks became more cautious about lending to builders, developers, first-time homebuyers and investors. Lenders scaled back their risk-taking altogether, required higher down payments and even dropped out of the acquisition and development (A&D) loan business for new residential developments.
As with any real estate cycle, the market’s recovery is slowly starting to ease banks’ concerns and risk tolerance. Lenders are becoming more confident about A&D and purchase loans for high quality borrowers. That confidence is paying off for buyers who can supply a substantial initial down payment.
And for borrowers with a checkered credit report, while foreclosures and short sales used to cause an automatic rejection by lending institutions they have grown so common that some banks no longer veto borrowers who have a foreclosure in their history. Banks that may have passed on a lending opportunity five – or even two – years ago now may be willing to fund loans to prospective landowners with a subprime past.
But as we venture out of the downturn, borrowers also are seeing a rise in mortgage interest rates. This trend will affect a land investor’s financial analysis, as well as the cost that buyers with loans ultimately can pay when the investor sells the investment land.
Growth in the South
From the Carolinas to Texas, southern states are experiencing a boom in population. Major metropolitan areas such as Atlanta and Miami aren’t generally where new residents choose though; bustling mid-sized cities and suburbs have become hot. In its most recent list of the fastest-growing American cities, Forbes lists 8 of the top 11 in the South: New Orleans, LA (#1); Charlotte, NC (#4); Fort Worth, TX (#6); Irving, TX (#7); Laredo, TX (#8); Greensboro, NC (#9); Austin, TX (#10); and El Paso, TX (#11).
So, if you plan to buy residential lots or land as an investment, look to the South.
Greater Interest in Raw Land as a Long-Term Investment
As we exit the market downturn, raw land – a parcel in its natural state with no development improvements – has become an increasingly attractive long-term investment. If you are patient and have the resources, raw land may provide a relatively low price tag for entry for an investor. But because it typically earns no income and provides few tax advantages, raw land may not be the ideal centerpiece for every investment portfolio.
The scarcity in finished lots mentioned above means that raw land that is appropriate for single family residential development will continue to grow more valuable. Lending still is slow for new development, but as we continue into a rising housing market expect that builders and developers will be looking for raw land for new development sites to fill their need for finished lots. So, this trend means that there likely will be an increase in value for vacant land that is prime for development. The best locations in the best markets will demand the highest prices first. But as with every home building cycle, over time the market and demand will creep further out from the “A” locations.
For investors with the resources, raw land represents possibilities and can be a wise option for the long term. When you buy a parcel of raw land, you can choose to “land bank” it and let it appreciate in value, plan to develop it for a higher use, sell it to a builder-developer or other buyer or just build on it yourself. That versatility is another reason that raw land has attracted renewed interest from investors.
Land for Rental Housing
The Great Recession and the collapse of the housing market caused a dramatic shift from a focus on the “American Dream” of homeownership to a more cautious consumer that was less-enthusiastic about the benefits of owning a home. As a result, there was an increased interest in renting.
When most people think of renting they think of apartments, and the apartment sector has been booming over the past few years to meet this demand for rental housing. So investors should consider that land that is able to be used for multifamily housing can be an excellent investment if the right opportunity becomes available.
But another angle on the rental housing trend is that many real estate investors – including large, Wall Street-funded investment groups like Blackstone – are feverishly buying up detached, single-family residential homes to use as rental properties. In some markets, and when the numbers make sense, investors even have bought vacant lots and land to build new homes as rental properties.
Increase in Regulations
The local, state and federal government departments that affect land and its development did not stop working during the economic downturn. Indeed, many areas saw regulation increase significantly during this downtime for the rest of the housing industry. From farmland preservation rules to stricter storm water controls, regulations continue to limit the land that is able to be developed and increase the cost of land development. While some of the regulation is well-meaning, the bottom line is that it makes it more challenging to develop land and sell homes at a price that works for buyers. Some areas of the U.S., like the New England and Pacific states, are seeing very high levels of housing-related regulations.
Land investors need to keep in mind how new regulations may affect their investments. Regulations can affect both whether you are able to sell land for your planned purpose and the price at which you can sell, especially when builders are struggling to keep homes affordable in your market.
Throughout history, the attractiveness of land as an investment vehicle goes up and down with the market cycles. And whether it’s swampland in Florida in the 1960s or a home lot in Las Vegas in 2007, land investors can learn lessons the hard way. Owning vacant land can be costly and risky, especially when the property is not producing income but you must continue to make mortgage and tax payments. Do your market research and your due diligence before buying. Consider that all real estate markets, and trends, are local – so a trend that may be happening in a popular Sunbelt city, may not even affect the market in a small Midwestern town. The land investment market can be fickle, so be sure that you are willing to be patient.
At the same time, with the land market still rising up from a bottom in valuations, there can be some outstanding opportunities for property buyers that are interested in investing in land. So consider whether any of these trends can provide opportunities in your market for your investment portfolio.
Let us know in the Comments below about any other land investment and market trends that you’ve been watching.