Should You Buy Undeveloped Land? Pros & Cons
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Summary:
Buying undeveloped land can be a successful endeavor as long as you understand the risks and the process of buying, holding, and developing the land. Those looking at undeveloped land must understand how to purchase it, how to make proper plans, how to build needed infrastructure, and how to maintain the property over time.
The great Tony Soprano once said, “Buy land, AJ; God isn’t making any more of it.” From the birth of civilization to Manifest Destiny and the Homestead Act, there is something viscerally joyful about owning land that is unique to the human experience. Owning raw and undeveloped land can seem like an attractive idea, but does it make financial sense? For individuals considering a land purchase (rather than developers), there are both upsides and downsides to compare. Is there any existing infrastructure or none at all? What is the process of building and obtaining financing on the land? If you want to build your dream home or just try your hand at real estate investing, you should be aware of the issues detailed below.
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What is undeveloped land?
Undeveloped land, also known as raw land, is land that has not yet been developed for human use. It is land in its most natural state without any buildings, utilities, driveways, roads, or other forms of improvements or infrastructure. The term “undeveloped land” can encompass everything from remote mountains to suburban development extensions.
Individuals and developers looking to purchase undeveloped land will typically focus on undeveloped land that is close to major infrastructure corridors like highways. Think of undeveloped land as a canvas on which you can build anything as long as it’s within the parameters of local regulations. Purchasing undeveloped land is a huge investment, so you will want to weigh the pros and cons before you spend the money.
Undeveloped land for personal use
Undeveloped land doesn’t necessarily need to be built out or developed; you could buy undeveloped land and use it as a park or campground. Most people, however, look at buying and developing undeveloped land to build their “dream house.” If you find yourself in this situation, here are some of the pros and cons to consider.
Pros of buying undeveloped land
A piece of undeveloped land can be like a blank slate for you to build your dream property.
Affordability
Often, buying vacant land or raw land without anything on it will be cheaper than raw land with a building on it. Depending on how much you pay for construction, it could be cheaper altogether than buying an existing home on land. Furthermore, the property taxes you pay on the undeveloped land while it’s still undeveloped are based on the value of the land, which is considerably cheaper than it would be with a finished property.
Potential return on investment
If you buy undeveloped land at the right time and in the right place, the upside can be incredible. Especially if the raw land is part of an overall larger-scale development project being steered by your city or county. The ROI and equity multiples from purchasing raw land to building on it can be very attractive to those who want to invest in real estate.
Build what you want
You can build what you want on the undeveloped land as long as it is within the limits of your local zoning restrictions. Many people already have an image of their perfect property, so it gives them an opportunity to build it from the ground up.
Value underneath the land
When looking at buying undeveloped land in specific areas of the United States, you must consider mineral rights. For example, after the fracking revolution, thousands of people found out they were sitting on land that could be sold or leased for a lot of money. Make sure that you check the current mineral and water rights on any undeveloped land you want to purchase.
Potential to sell part of it
You don’t have to buy a piece of land with just one parcel to build. Instead, you can buy a property that could fit three homes. After the planning process, you can sell two of the other fully-planned parcels before you even build on them. Or you can build three homes, sell two of them, and keep the last home for yourself to live in.
Pro Tip
You can invest in undeveloped land without having to actually buy land in rural areas and develop it yourself. Instead, you can choose to invest in a real estate investment trust (REIT) that deals with the purchase and conversion of undeveloped land.
Cons of buying undeveloped land
There is a downside to buying this type of land. Be sure you understand what you might be up against before you buy.
Lack of infrastructure
Depending on where you buy undeveloped land, the lack of infrastructure in the area could be a problem, especially if it’s already sparse. Remember, undeveloped land will often be near future extensions of major roads and highways. Those extension areas need a network of roads connecting different areas, which in most cases, will be developed by the city or county. Government infrastructure projects take time to complete, though, so there could be delays. Furthermore, if you do need to put in your own driveway or gravel roads, this could add additional costs.
Planning and zoning issues
When you buy undeveloped land, it could be in various stages of zoning and planning. You could buy a plot of undeveloped land that has been zoned with planning granted for a specific type of house in which you already have the house plans. Or, the land could be in the completely “raw” stage of zoning and hasn’t been zoned for every type of use yet. You’ll need to wait out various government bureaucracies to get proper zoning, which takes time.
Time
If you buy undeveloped land, you might not get to move in right away. You need to make sure you have the proper zoning, get the right contractors, and potentially wait for the undeveloped land to be built out. This could take months or even years, so you will need to be prepared to live somewhere else while you do it.
Negative cash flow
Remember, as you can’t make any money off the land until you build and rent, yet you still have to pay property taxes, in most cases, more time = more negative cash flow.
Dealing with contractors
If you deal with a good, above-board contractor, you should be able to lock in an insured price per square foot. That doesn’t mean general contractors and their various subcontractors are easy to deal with, though. If anyone has remodeled an existing home, you know that dealing with builders can be stressful.
Buying raw land and the building process
These are the steps you need to take in order to buy undeveloped land and build on it.
1. Purchase land
When you have found the land you want to purchase, you need to determine how you will buy it. You can finance land purchases, but the down payment will be higher than if you were to buy an existing home. Remember, the financing and down payment should also reflect if and when you want to build on it. You can get a land loan, but the way you structure it might affect the financing when you decide to build.
2. Conduct a land survey
You will need to get a land survey to reconfirm the borders of your property, as well as get an idea of what and where you can build.
3. Check/apply for zoning
Maybe the land is already zoned to build what you want, and maybe it’s not. If not, you will need to go to your city government office and go through the zoning process.
4. Obtain designs or blueprints
Sometimes, prepackaged undeveloped land will be sold with a blueprint for a pre-approved structure to be built. However, if you want to design a home yourself, you will need to consult an architect to assist you with the plans.
5. Obtain financing/construction loan
How are you going to finance the construction of a house on the land? One option is to use the FHA home construction program. It allows you to pay 10% of the cost, and then the loan converts to a regular FHA mortgage on the property’s completion. Another option, if you own an existing home, is to tap your own home equity and pay for construction with a home equity loan.
6. Build infrastructure
If the property you want to buy is completely raw land, then you will need to invest in basic infrastructure. This can go beyond access roads and driveways to include the underlying connections to the wastewater and electrical grid.
7. Build the home
After the infrastructure has been completed, it’s time to build the home. Once complete, you will have turned undeveloped land into your very own home.
Get financing for a land purchase
Looking for a loan to purchase land or perhaps a construction loan to build something on land you already own? Read SuperMoney’s Ultimate Guide to Land Loans and explore some financing options below.
FAQ
What is the difference between developed and undeveloped land?
Undeveloped land, also known as raw land, is land that is in its natural state and has not had any improvements or preparation for building.
Is buying undeveloped land a good investment?
Buying and developing land can be a good investment if done the right way. You need to buy the right piece of land at the right time. Furthermore, you need to have your financing and construction plans secured before you build.
Is undeveloped land a real asset?
Yes, undeveloped land is a physical asset with the potential to create a return so it is considered a real asset.
What is considered developed land?
Developed land is land with any physical improvement or human development on the land. Developed land can come in different stages of development. But it can include services, water, electricity, drainage, buildings, structures, or such improvement that may enhance the value of the land for industrial, agricultural, or residential purposes.
What to avoid when buying land?
You should avoid buying land with no zonings, land that is too far away from any major government infrastructure, and land that is difficult to build foundations on.
How can I make money with undeveloped land?
You can make money off undeveloped land in several ways. For example, you could purchase land with natural gas underneath and make money from selling the mineral rights. You could buy the land, secure planning/zoning, and sell it off to someone else after (flip it). You can build a home on the land and flip it for a profit, or you can sell some parcels and develop some yourself after planning.
Key takeaways
- Buying undeveloped land can be a successful endeavor as long as you understand the risks and the process of utilizing or developing it.
- Undeveloped land or “raw land” is land that has not been improved or has no human development on it. It lacks any buildings, roads, or infrastructure.
- Buying undeveloped land can have advantages such as the freedom to build what you want, a low entry price point for the land, and a high potential for returns.
- Dealing with the planning, financing and construction elements of undeveloped land can be a pain that is not worth it for some.
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