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If you bought land in California in the 1970s, you’d probably opine that land is a good investment. If you bought it in 2006, and now it’s worth a fraction of what you paid, your opinion would probably differ. Most knowledgeable real estate investors will agree that buying land is not a good idea, and this includes buying small parcels of land and/or potentially investing in a large land deal. There’s just way too much risk.

Land is speculative

Here is the issue with land: It’s a 100 percent speculative investment. You are 100 percent hoping that the value will go up to provide you a fair rate of return. And it might. But will it go up enough to provide you a fair rate of return for the extreme risk that you are taking holding that land?

Here’s the risk

Let’s say you buy $100,000 worth of land, and you pay cash. It’s still going to cost you money each month to cover property taxes and insurance. And, here’s the kicker: It’s also costing you the opportunity cost of capital.

You probably took $100,000 out of your mutual fund account, or other financial asset, to buy the land. And when that money was in the financial account, it was probably earning interest — let’s say 5 percent — but now it’s not earning anything because you took it out of your account to buy some dirt. So you’re really effectively losing 5 percent in wealth each year because you’re not earning that return. Unless, of course, the land goes up that much in value plus compensating for property taxes, insurance and other annual costs.

As an example, if you have $100,000 and put it into a mutual fund, you’d earn 5 percent, or $5,000, per year. That’s cash in the bank that you can reinvest to earn even more money. After 10 years you’d have your original $100,000, plus $50,000 to $70,000 additional cash/financial asset earnings.

On the other hand, if you bought land, you’d earn no interest or dividends, and after 10 years you’d have a piece of dirt that you’ve been paying taxes on. Will your land have gone up enough in value to match the returns you would have earned on a financial asset?

In addition to those significant financial issues, land also can be contaminated, undevelopable or have significant development restrictions, among other issues.

Who might consider land?

Land may be a good investment for home building companies and long-term corporate land investors with extensive development and entitlement skills and experience, and significantly diversified portfolios of land to reduce their overall risk. But for small investors, it’s a high-risk gamble with little chance of earning a fair rate of return. There are much better investment opportunities, such as stocks, bonds, mutual funds, rental properties or, quite frankly, heading to Las Vegas for the weekend (where, by the way, many an investor has learned some tough land investment lessons in the past decade!).

Related:

Leonard Baron is America’s Real Estate Professor® – his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches potential real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

  • joel1618

    Every investment is costing you the opportunity cost of that investment. The idea is to beat the opportunity cost. That’s what makes an investment a good investment. You can also look at it from the flip side and see the opportunity cost of not investing in whatever investment you are thinking about investing in. If you get 10% on the land and 5% in whatever else you’re opportunity cost is 5%.

  • BigK100

    Agree with Joel here. The reality is more fortunes have been made investing in land than in cashflowing real estate properties/rented homes. The key is to invest AT THE RIGHT TIME. Buy at the lowest possible price, wait as the market recovers, and sell for profit. Meantime, it’s much cheaper to hold than a rented property – no management fees, maintenance issues, void periods, sticky tenants etc. Very low holding costs through lower property taxes, no income tax liabilities, and in most cases, provided you buy strategically and in the right neighborhoods, very real potential to double your investment within a few years. We are very active in SW Florida at the moment and our investors who bought only 6 months ago are already seeing uplifts of around 25% on their acquisition prices. the key is to be smart and buy in the best locations, through someone who has access to undervalued deals.

  • James

    well said, i don’t understand why the internet is littered with experts proclaiming that Land is the worst investment ever ? i mean i can’t find a single expert that says its a good investment, strange as Land has always been the best performer.

    Apartments for example involve huge costs like maintenance, housing association fees, brokerage fees for management companies, tenant disputes and in the end your rental return is no more than 2%-3% and if the building is poorly maintained you won’t get much return when you sell.

    Land is the best because initial cost is low, no maintenance cost involved, and people always looking for land as its cheaper to buy land and build than buy a ready made home. The only thing that affects land price is if the area you bought it turns into a slum but that also applies to apartments and homes.

    Land is definately not 100% speculative, i’ve seen in the vast majority of cases you are guaranteed a profit pretty much if you hold for at least 3 years +

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