There’s an adage in real estate that goes:
“It’s not the house that increases in value; it’s the land beneath it…”
Meaning, the land is the scarce resource representing most of the value in any property asset. Technically, the structure on top of the land depreciates (drops in value) over time as the materials wear down.
When you buy houses based on their features, you are paying for the right to live on the piece of land that home sits on.
So, does that mean that buying an empty section would make a wise, relatively carefree investment? The answer is, it depends. Here are a few key points to consider if you want to add land-banking to your list of assets.
Saleability & Liquidity
In a hot market, buying land always looks like a good idea. It’s not uncommon to find stories of sections going up in value by hundreds of thousands of dollars in a few short years, especially in the main centers. But real estate investors and salespeople who have been around a while know that in a down market, bare land can be hard to sell, with sections often sitting on the market for months, garnering little to no interest.
Potential buyer market
Part of the reason sections can be hard to sell is that the potential buyer market is limited. You need to find a buyer who has the funding, flexibility, vision, and patience to build brand new—someone who can take a blank canvas and turn it into a liveable home.
Banks know this too and are sometimes reluctant to lend money against bare land unless there is an actionable plan to build a home on it soon.
Bare land is not an expense-free investment. There will be local authority rates to pay and maintenance costs if the grass needs to be mown occasionally. In addition, if you borrowed money to buy the land, you will have mortgage interest costs, too.
Conversely, if you paid cash to buy the land, there is the opportunity cost of that investment. Specifically, the return you could have received if you invested that money somewhere else.
You’ll be hoping that the increase in value of your block of land goes up enough to cover these costs and more, but you won’t be able to realize that value growth until you choose to sell that land.
Unlike a house (which you can rent), there is a slight possibility of earning a return from your vacant land during your period of ownership. So you will need to have a way to pay those ongoing costs for as long as you choose to own the land.
But what about the upside!
As we alluded to at the beginning, the land is a finite resource. They aren’t making any more of it. And most of the best features of any property are related to the land it sits on: Sun aspect, views, access, proximity to amenities.
Buying bare land allows you to secure your ideal spot for future benefit, even if you don’t plan to build anything there in the immediate future. For example, you might buy a section in a small town you want to move to one day, or near a school you want your kids to go to when they are older.
Some sections also can be subdivided in the future, especially if you expect a zoning change at some stage. Buying rural land on the edge of expanding suburbs can pay off massively if you are prepared to hold the land long-term.
Before you jump into any bare land purchase, seek expert impartial advice. It’s critical to speak with an experienced lawyer before going ahead, primarily if the title/deed hasn’t been issued yet, which is common when buying sections.
If you are looking at buying Eugene Real Estate strictly as an investment, consider your alternative options alongside that decision, including purchasing an existing home that you can rent out to help cover any ownership costs.
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