Is Buying Land A Good Investment?

When it comes to land, one thing is certain: land is a fixed asset with limited supply. You cannot mine, manufacture, or create more land. There is only so much arable land in the world, and its value seems to be steadily rising, rejuvenating the age-old prospect of direct land ownership as an investment.

With any investment, there may still be some risk, and you’ll certainly have to do your due diligence. This article will cover some of the reasons why land may be a good investment, and how you should get started if you’re beginning the search for the perfect property.

Where To Buy Land for an Investment

Average Return on a Land Investment

Buying Land for an Investment

What Type of Land To Buy for an Investment

There are various types of real estate that you can buy and hold as an investment, but be sure to choose based on your personal goals. Productive land may generate passive income while the property is being held and appreciating in value, but land held for enjoyment may still be considered an investment.

Consider these varying land types:

Recreational Land

Recreational land may be one of the most versatile land types to hold as an investment. From lake houses to hunting tracts, recreational land may function as a property that you can utilize while simultaneously holding it as an investment.

Farmland

Farmland can be a little more hands-on than other land types. Depending on whether you intend to hire an operator to run the farm, this type of investment can involve a lot of hands-on work, but also offers more aggressive passive income opportunities.

Timberland

Timberland is yet another unique land type that may generate real revenue and function as a long term investment. There are many different exit strategies with timberland, and some potential for passive income depending on the tract you purchase.

Ranchland

Ranchland serves as another land type that may be more hands-on. If you’re interested in using the property for homesteading while building equity through a well-managed ranching production, this may be the investment type for you.

The average return on a land investment varies by land type and region, and many other factors may further contribute. It is important to remember that land is viewed as a long term investment to slowly compound growth. Quick return is rarely the goal.

Consider these potential ways to enhance your investment portfolio with land:

Appreciation

As interest rates rise with the cost of living, the cost of the land we live on also appreciates.

With farmland, rather than fearing economic instability, investors have an opportunity to hedge against inflation since the asset class has a direct correlation to commodity prices.

The land market is not guaranteed and may fluctuate, although it can be argued that the land market is, in fact, more stable than the market for many other investment options. For example, according to data collected by the USDA, the Compound Annual Growth Rate (CAGR) of farmland for the past 50 years has been 5.9%.

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.

While it is more difficult to calculate the return on direct investments in land types other than pasture land, because of lack of data, the finite supply of land and relatively low volatility points towards a potential source of 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

Each land type is a hard asset and may present a new form of passive income depending on how the owner wishes to operate their land investment. Consider just a few ways that passive income can be earned on a direct land investment:

• Farmland has historically produced positive cash flow for investors in the form of cash rent, crop share, or custom farming.
• Recreational land can similarly produce a positive cash flow for investors in the form of hunting leases, for example.
• Aside from the obvious source of income deriving from the harvest, timberland tracts also utilize hunting leases as a way to generate passive income. Additionally, some timber tract owners produce a positive cash flow via pine straw rakes.

Land Improvements

From cleaning up dense forests and underbrush to implementing infrastructure improvements, there is never a lack of work to be done on any land type. As a direct investor and owner of your own property, you’ll have the free will to manage property improvements as you see fit.

Land improvements can take many forms. Consider these possibilities:

• For farmland, a land improvement may include laying drainage tile or implementing an irrigation system.
• For recreational land, it may be establishing a food plot and improving the habitat of the vegetation and wildlife.

Any work done on your land that improves the property is a land improvement and has the potential to increase its value and appeal when you are ready to exit your investment.

Sustainable Land Improvements

Sustainability practices may also be considered land improvements. For example, farming practices that limit soil erosion are considered sustainable land improvements. Similarly, preventing overgrazing on pastureland, managing invasive species of vegetation, insects, and wildlife, and redirecting water runoff from polluting nearby water sources are all examples of sustainable improvements.

If you choose to implement land improvements on the property you’ve invested in, you will not only build equity by paying the mortgage, but also through value-add improvements made to the land.

Pros of Investing in Land

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

• You may qualify for a 1031 exchange on the property and continuously build equity into bigger and better land types by deferring the capital gains taxes and reinvesting based on your portfolio cadence.
• You are not obligated to sell your land at a specific time. If the land market is low, you can choose to hold the land until the market is high again. Similarly, if you’ve invested in timberland and the timber market is low, you can simply wait until the timber market rises before harvesting or selling the land.
• There are many different diverse land types that all have potential for investment opportunities. Whatever your goal may be with this investment, there is likely a land type for you.

Cons of Investing in Land

The cons of investing in land are similar to the risks involved with other types of investment types. The market can be unpredictable, and there are no written best practices for when to buy or sell land.

Consider these potential cons of investing in land:

• Unexpected costs. If you invest in land through direct ownership, you may be faced with upkeep costs such as damage control due to natural disasters, poor land management in the past, or unexpected taxes.
• High capital upfront. Purchasing land outright may mean high upfront costs and considerable upkeep that sometimes dissuades investors.
• Hard work. If you plan to make property improvements on your own, or operate the property on your own, it may be a lot more work than you originally thought.

The good news is, land investments are diverse. There is likely a land type suited to your needs, and these risks may be avoided or mitigated with good planning and due diligence.

If there were a single right answer to this question, that area would have no more land left to buy. Luckily for investors seeking to become landowners, there are many regions that would make great land investment opportunities.

Ultimately, you should do your own due diligence with your investment goals in mind, and identify areas that you believe may work for you. Think about these questions:

• Do you need to be physically close to the land you’re buying to meet your goals? In other words, are you wanting to be hands-on with any renovations or improvements to the property? Or do you plan to contract these out and rarely lay eyes on your investment?
• How do you intend to utilize the property? Do you want to work the land or simply hold it for an investment? Do you plan to benefit from what the land has to offer? For example, if you’re wanting to own and hold a hunting property, and then sell it for a return in the years to come, you should consider the game type that you want to hunt, and research the best regions for hunting that game.
• Overall, what is your end goal with your investment? This may help you choose the land type, which will help you narrow down your search to a specific region.

Luckily, resources to aid in your search do exist. There are many land valuation tools that may give you insight into micro-markets, areas that are performing well, and areas that are specific to certain types of land use. For example, if you’re interested in investing in farmland specifically, there are farm valuation tools available.

Using a specialized land broker that works with the type of land you’re seeking instead of a general real estate agent will 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 comparables in the area.

Given the growing popularity and finite supply of land, there is a positive trend associated with storing cash in land ownership.

Direct investments in land or real estate come in many different shapes and sizes. Depending on your goals and the level of involvement you plan to have with your investment, there is a land type out there just for you.

Remember, do your due diligence, identify your goals, and seek out a specialized land agent.