Is Buying Land A Good Investment?

In today's world, investing in land has become an attractive prospect. The limited supply of land makes it a valuable asset that can consistently appreciates in value over time. Land has always been a highly sought-after asset, but it is now being recognized as a smart and profitable investment. However, like any investment, there may be risks involved, and it is essential to weigh the pros and cons before making a decision.

In this article, we will explore the reasons why some individuals consider investing in land and provide guidance on how to begin your search for an investment property. We'll explore the different types of land you can invest in, the potential returns on your investment, and the pros and cons of investing in land. Our goal is to help you make a well-informed decision about whether investing in land is the right choice for you and your financial goals.

So, if you're thinking about investing in land, keep reading!

Contents

What Type of Land To Buy for an Investment

Average Return on a Land Investment

Buying Land for an Investment

Where To Buy Land for an Investment

What Type of Land To Buy for an Investment

When considering buying land for an investment, it's important to choose based on your personal goals. There are various types of real estate available, from productive land that generates passive income to land held for personal enjoyment that can still be considered an investment.

Let's take a look at the different types of land available for investment.

Recreational Land 

Investing in recreational land offers the best of both worlds - a property that you can enjoy while also holding it as a valuable investment. With options ranging from lake houses to hunting tracts, recreational land can be a versatile choice for those looking to diversify their portfolio.

Farmland

If you're considering investing in farmland, keep in mind that it may require more hands-on work than other land types. However, this can also provide more opportunities for passive income. You can choose to hire an operator to run the farm or get your hands dirty and manage it yourself. Either way, there are potential rewards for those willing to put in the effort.

Timberland

Timberland is a fascinating land type that has the potential to generate significant revenue and serve as a long-term investment. With multiple exit strategies available, along with passive income opportunities depending on the tract of land purchased, timberland can be a great addition to your investment portfolio.

Ranchland

If you're looking for a more hands-on investment, ranchland may be the perfect choice for you. You can enjoy homesteading while also building equity through well-managed ranching production. It's a great way to invest in something you're passionate about while also diversifying your portfolio.

Average Return on a Land Investment

It's essential to keep in mind that investing in land is a long-term strategy for steady growth, and the average return varies depending on the land type and region, among other factors. Quick returns are not the primary goal, so patience is key.

Here are some ways that investing in land can be a valuable addition to your portfolio:

Appreciation 

Investing in farmland can provide a hedge against inflation as the cost of land tends to appreciate with rising interest rates and cost of living. This is because farmland has a direct correlation to commodity prices, making it a valuable asset class for investors looking for stability in uncertain economic conditions.

It's important to note that the land market is not immune to fluctuations, but it's arguable that it's more stable than other investment options. The USDA's data shows that farmland has had a Compound Annual Growth Rate (CAGR) of 5.9% over the last 50 years, providing a reliable source of growth for investors.

Similarly, the USDA annual Land Values Summary reported that pasture land, often associated with ranchland, appreciated from $1,060 per acre in 2010 to $1,650 per acre in 2022. While the correlation to commodity prices isn’t as black and white with pasture land, statistics show the land itself is still experiencing considerable appreciation. 

Although it may be difficult to calculate the exact return on investment for certain land types with limited data, the fact that land is a finite resource and tends to have lower volatility suggests that it holds promising potential for income and appreciation.

Note: These statistics do not include the return on the investment in terms of commodities that may be grown or farmed (timber, hay, crops, livestock, etc.), only the appreciation of the land itself. 

Passive Income

As an investor, owning land can provide various opportunities for passive income depending on your preferred management style. Here are just a few examples of how you can generate passive income through your land investment:

• Investing in farmland can provide a steady source of income for investors through cash rent, crop sharing, or custom farming.
• Investing in recreational land can also offer the potential for a positive cash flow through activities such as hunting leases.
• Apart from the revenue generated from harvesting timber, timberland tracts also offer opportunities for passive income through hunting leases and the production of pine straw rakes. 

Land Improvements 

As a land investor and owner, you have the freedom to manage property improvements according to your preferences. From clearing dense forests and underbrush to undertaking infrastructure upgrades, there's always something to do on any type of land.

Land improvements can take many forms. Consider these examples:

• When it comes to improving farmland, options like installing an irrigation system or laying drainage tile can be valuable investments for the long-term health and productivity of the land.
• For those looking to enhance the natural beauty of their recreational land, consider establishing a food plot and improving the habitat for the local vegetation and wildlife.
• By selectively thinning out weaker or overcrowded trees in timberland, you can create more space, light, and nutrients for the remaining trees to flourish. This not only promotes the growth of high-quality timber but also enhances the overall resilience of the forest ecosystem.
• Implementing rotational grazing in ranchland improves forage management, minimizes soil compaction and erosion, and promotes healthier vegetation growth. It also allows for selective rest periods, enabling pastures to recover and regenerate, leading to enhanced productivity and sustainability.

Improving your land can be a smart investment for the future. Any enhancements made to the property have the potential to increase its value and appeal, which can be a great advantage when it comes time to sell.

Sustainable Land Improvements

By making sustainable improvements to your land, you not only benefit your investment but also contribute to a healthier environment. Implementing farming practices that prevent soil erosion, overgrazing, and invasive species, and redirecting water runoff away from nearby water sources can increase the long-term value and productivity of your land while also promoting sustainability. This way, you can enhance your investment while also doing your part to protect the planet.

Buying Land For Investment

Pros of Investing in Land

Consider these additional unique pros associated with holding land as an investment:

• Another advantage of investing in land is the potential for a 1031 exchange, which allows you to defer capital gains taxes and reinvest your profits into bigger and better land types to continuously build equity. This can help you achieve your investment goals while minimizing your tax burden.
• You have the freedom to decide when to sell your land and can choose to hold onto it until the market conditions are more favorable. For example, if you've invested in timberland and the timber market is down, you can wait it out until the market recovers before considering a sale or harvest.
• With such a wide range of land types available, you're bound to find one that fits your investment goals perfectly. Whether you're seeking passive income or long-term appreciation, there's a land investment opportunity out there for you.

Cons of Investing in Land

Of course, like any investment, there are potential downsides to investing in land. The market can be unpredictable, and there is no guaranteed formula for determining the best time to buy or sell. However, with careful planning and research, these risks can be minimized, making land an attractive investment opportunity for those looking to diversify their portfolio.

Consider these potential cons of investing in land: 

• It's important to keep in mind that owning land directly may come with unexpected costs such as damage control due to natural disasters, past poor land management, or unforeseen taxes. However, with proper planning and research, these costs can often be mitigated or minimized. 
• While it is important to keep in mind that investing in land may come with high upfront costs and ongoing upkeep expenses, these factors can be managed with proper planning and research.
• It's important to keep in mind that investing in land may require some effort, especially if you plan on making property improvements or managing the property yourself. However, with proper planning and a little hard work, these tasks can be achieved and can lead to great rewards in the long run.

Fortunately, there are plenty of options available when it comes to land investments. With some careful research and planning, you can find a land type that fits your needs and mitigates potential risks.

Where To Buy Land For An Investment 

The location of the land you buy can significantly impact its value and the returns you see on your investment. When deciding where to buy land for an investment, consider factors such as economic growth in the area, population trends, proximity to cities or amenities, and natural resources on the land. Areas experiencing rapid growth or urban expansion can often be good investment opportunities, as property values typically increase in these regions.

Investing in land can be a profitable venture, but like all investments, it requires due diligence, knowledge, and patience. Remember, the key to successful investing is not just buying the right type of land but also buying it at the right price and in the right location.

Luckily, resources to aid in your search do exist. Acres is a land research platform that can help you conduct fast due diligence before meeting with a broker or seller. This helps you come prepared with informed questions about land use and potential challenges on a property.

Using a specialized land broker that works with the type of land you’re seeking instead of a general real estate agent will also keep you a step ahead in your journey. Land experts are not just experts in the land, but also in the micro-markets, data analytics, and comparable sales in the area. 

Final Thoughts

With a limited supply and a generally consistent growth rate, investing in land offers an appealing opportunity for those looking to diversify their investment portfolio. There is a vast array of investment prospects available, including direct investments in real estate, that cater to diverse goals and investment levels. With options for passive income or long-term appreciation, there is a land investment opportunity out there for everyone to explore.

Remember, do your due diligence, identify your goals, and seek out the help you need. If you’re looking for land or want to quickly evaluate a potential property, join Acres for instant access to sales data and insights for millions of U.S. parcels!