Deciding to purchase undeveloped land is a significant financial commitment. Therefore, before you decide to move forward with a purchase of undeveloped land, it is critical to review the pros and cons and ensure that a land purchase is a good investment for you after careful consideration.
The pros of purchasing undeveloped land
Flexibility is one of the primary reasons people purchase land to build on, as many people choose to build their dream home on the land. Unlike when buying a home, the land can be customized and designed to include anything you want in a new home. However, building a dream home is not the only use of land. You can also buy it as an investment to rent to farmers, operate as a parking lot, or even for storing items like recreational vehicles.
Less Market Competition
Even though the US housing market is showing signs of slowing, there is still plenty of competition for single-family homes. When you buy a piece of undeveloped land, you will generally have much less competition. Building a new house is a long-term commitment and, at times, a complicated process. There are just not as many buyers willing or able to go through the process.
While owning vacant land should be considered a long-term investment, it has the potential to offer the purchaser a high rate of return. People will always need more land, so holding a vacant lot for a long period of time will likely result in a profit.
Cons of Purchasing Undeveloped Land
When it comes to land, lenders are taking on much more of a risk as plans have not been approved, etc. As a result of the increased risk, you can expect to pay up to 50% of the price for a down payment in order to obtain financing for the rest of the purchase.
In order to build on land, you will need to go through the local permit office to get the permits for the project. It is important to know before you consider purchasing a piece of land that the cost of permits can be thousands of dollars. It can also be a time-consuming process to do the paperwork to obtain the permits.
There are many restrictions on what can be built or developed on specific parcels of land. It is critical that you do your research on exactly what the land can be used for before purchasing the lot. If the lot has very restricted use due to zoning laws, it can end up being a very bad investment.