Raw Land Purchase
Banks deem undeveloped land as the riskiest of all the different types of real estate investment vehicles. Financial advisors generally counsel against land purchases for almost all private investors; saying that it is, at best, a place to invest only money that you're quite sure you won't be needing anytime soon. But what makes investing in land so risky? Well, here are some issues to consider:
- The majority of raw land purchases generate no income during the period of ownership, thereby creating a negative cash flow situation due to the accrual of ongoing property taxes.
- Because land is fundamentally considered indestructible, there's no deprecation allowed for federal income tax purposes.
The municipality in which the land is located governs by zoning how the land can be used. - Development of the land is also subject to environmental testing and regulations.
- Raw land is the most illiquid investment of all of real estate; which, as a whole, is considered to be an illiquid investment genre. It can take literally years to sell some land parcels, and others truly may not be marketable at any price.
As a result, the major lenders will only lend up to 50% of the land’s market value. Some trust companies will consider 75% in certain situations. If the land is used for agricultural purposes, some farming based lending maybe available.
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