Investing in Raw Land: This Land Was Made for You and Me

Raw Land Investment: A Flexible, Long-Term Option

Real estate can be a ‘high-maintenance’ investment requiring significant up-front capital and recurring financial commitments, such as property management. Investing in raw land could be a promising alternative if you want to invest in a physical asset like real estate but want to avoid the challenges posed by commercial or residential real estate.

What Is Raw Land Real Estate?

Raw land is natural, unrefined land that has not yet been developed. In this way, it is full of possibilities. Investing in raw land allows you to reap the benefits of a tangible asset without much of the trouble posed by other forms of real estate in terms of knowledge and financial resources.

If you’re looking to resell for a quick profit, then investing in raw land may not be the right choice, as it could be many years before a potential seller makes an offer.

Investing in Raw Land

Raw land investment can have substantial benefits if the right choices are made at the right time. Undeveloped parcels can offer large returns if you sell to a motivated builder or developer in a high-growth area. You can also generate monthly income by reselling through owner financing or subdividing into leased lots.

Some obvious benefits of raw land investment include low acquisition costs, less competition, flexibility of use, and low maintenance costs. These and other qualities increase an investor’s potential for return on investment.

Clearly, raw land investments offer big upsides. But what kind of due diligence should you perform before investing? Here are seven considerations to keep in mind as you navigate this exciting asset class.

1. Location

The variety of raw land in the United States is as diverse as the nation’s geography. However, not all raw land is equal in quality or value. Often, the location of a piece of raw land is directly related to its price as well as its economic feasibility. A potential investor needs to know which raw land is worthy of investment.

When considering a raw land investment, you need to spend considerable time reviewing prices and values specific to the region in which you plan to invest. On average, undeveloped land in the US is valued at nearly $16,000 per acre. However, you can expect those prices to be much higher in states like California, for example.

All raw land will always have some value. However, land located in or around a desirable, developed area with a growing population will see quicker appreciation and, ultimately, a better return.

You’ll also have to be aware of the zoning regulations specific to the region in which you plan to invest and how those regulations align with your plans for land use.

2. Conditions

Depending on your intended use for the land, you will need to carefully consider proximity to utilities and infrastructure, as well as natural conditions. The ability to access basic infrastructure like electricity, water, and sewage will be vital for any development you plan to undertake. Important considerations for any planned residential use include proximity to roadways, schools, medical facilities, shopping, dining, and recreation. For any planned recreational use, pristine environmental conditions, like air quality, will be essential.

3. Property History

The due diligence on a house or other common types of real estate is typically a well-marked path. This is not always the case with raw land.

So, it is critical to research the property, including the identity of the seller and the length of ownership, to assess a potential raw land investment. If the current seller has not held the land for long, it could be a red flag. To mitigate your potential risk, work with experts and your attorney to ensure your investigation is thorough.

4. Risk

You should be prepared for the risk inherent in tying up capital in raw land. It’s no different than any other investment. However, investing in raw land brings specific risks of its own. At a bare minimum, you should be prepared to pay annual taxes regardless of the cash flow (or lack thereof) generated by the land.

Short-term cash loss or expensive development costs are challenges you may face and need to navigate. You may even encounter larger-scale challenges like an economic downturn that could prevent you from selling the land for a high enough price to generate a profit.

5. Investment Experience

Venturing into any new investment can be complicated and risky. Raw land is undeveloped and vacant, so it will not generate income right away, if ever. There is no guarantee that you will make money or recoup your original investment. While raw land investments offer a valuable hedge, this benefit is for the savvy investor.

6. Financing Power

Securing a lender for a raw land purchase can be challenging. Also, you can expect to pay more. Higher costs include a bigger down payment, approximately 30% higher than a traditional mortgage, and steeper interest rates. The overall term of the loan is usually longer, as well. In some cases, you can avoid the higher interest rates by obtaining seller financing.

7. Supply and Demand

Like any investment, timing is critical. To maximize your returns, try to buy raw land during periods of surplus, when prices are low, and sell during periods of scarcity, when prices are high.

According to Genieve Posen, “Anyone interested in investing in land should have a strong understanding of market cycles and real-time market activity to make the strongest strategic moves.” If you don’t have that knowledge, make sure you are working with someone who does.

Raw Land Investing Has Potential

Despite the risks and potential pitfalls, with proper due diligence, knowledge and expert advice, the savvy investor stands to earn a healthy return on raw land purchases.

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Valuing Real Estate Assets
2. Single Asset Real Estate Cases
3. Ethical Issues In Real Estate-Based Bankruptcies / Insider Lease Agreements

This is an updated version of an article originally published on March 11, 2019 and updated on March 29, 2021 and April 15, 2024.]

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