Oftentimes I have noticed the average investor doesn’t ask themselves the 3 most important questions before investing any piece of property. Usually, they get emotionally involved in the imaginative issues with the property. They can see it as a wonderful homestead or a refuge from their busy lives. Yet, before jumping in feet first you should ask yourself these 3 questions:
1. Are the taxes low enough on this piece of property so if my circumstances change and I can’t for whatever reason be able to accomplish my initial goals that I have for this piece of property is it going to affect me negatively in the long run?
You never want to get stuck with a piece of property that could become a liability for you and not an asset. Land can be a great long-term investment, but it can take many years for that piece of property to appreciate in value and each year you have to pay the taxes on that piece of property. If the taxes are so high that it’s going to become a financial burden and as a result you may one day have to liquidate that piece of property at a loss, then the whole purpose for buying the property has been wasted. I love rural property simply because of its natural beauty, the open spaces, the privacy associated with it and the lack of restrictions. Nevertheless, I can hold on to that piece of property for many years without it becoming a financial burden simply because rural property typically has a lower tax basis than an already improved piece of property.
2. What is compelling about this piece of property?
Before I invest in any piece of property I ask myself what is so compelling about this property that if I had to sell it tomorrow to another buyer they would also find the same attributes about the land compelling. For example, am I buying this property because of its natural beauty? Does it have mountain views, or is it near a lake or major body of water? Am I near a large city that is growing or has many amenities that most people would enjoy? Is there a creek running through the property or am I in the path of growth? Can I farm this land or is the terrain a perfect place for recreational use? That is, don’t invest in the property simply because it seems like it’s a great deal. If price is the first and only consideration, you may be making a huge financial mistake because ultimately that property will go up in value and if there is not something compelling about that property to another buyer you could simply be stuck with it.
3. How do I know I’m not overpaying for this piece of property?
Determining what you should pay for a piece of property as is often trickier with raw land than it is for a home or apartment building. With housing it’s very easy to look up the comparable sales in the neighborhood and see what most people are paying and what range. However, with raw land there are so many factors that come into play that each piece of land needs to be evaluated on its own merit. Typically, you need to first determine what your highest and best use for that piece of property is going to be. If you are planning on building on that piece of property what are the costs that are going to be associated with that? How much to install a well? Do you need to blade roads? How much to tap into power or go solar? What will that cost? Any improvements you make to the property need to be factored in to the total cost of the investment. Then, you need to contact the local realtors and see what similar pieces of property are selling for in the same area. Maybe another seller has already made the improvements that you are interested in and you can get it for a better price and fewer headaches. After you do all this analysis, you should get a good idea of what you should pay for this piece of property. If the seller is not realistic about the price, let them know during your negotiations why you think the property is overpriced before you make that low ball offer. Another place to look is Craigslist and see what people are selling their lots for on a for sale by owner basis. If you notice that the property you are interested in is higher than the for sale by owner listings on Craigslist that’s a good indication you may be overpaying for that piece of property although again each piece of property is different and you have to look at each unique attribute of that property.
Asking yourself these 3 important questions before making any land investment is going to save you money and is going to make you a much more sophisticated land investor.
If you found these 3 questions helpful in your land search leave me a comment.
