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Real Estate

Is land a good investment?


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comp:00005083ac36:0000000540:6c6f 0 <div class="the-content clearfix"><p>If you bought land in <a href="http://www.zillow.com/ca/">California</a> 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 <a href="http://www.zillow.com/">real estate</a> 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&#8217;s just way too much risk.</p> <h3>Land is speculative</h3> <p>Here is the issue with land: It’s a 100 percent speculative investment. You are 100 percent hoping that the <a href="http://www.zillow.com/local-info/">value</a> 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?</p> <h3>Here’s the risk</h3> <p>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 <a href="http://www.zillow.com/directory/real-estate-services-insurance/">insurance</a>. And, here’s the kicker: It’s also costing you the opportunity cost of capital.</p> <p>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&#8217;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&#8217;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.</p> <p>As an example, if you have $100,000 and put it into a mutual fund, you&#8217;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&#8217;d have your original $100,000, plus $50,000 to $70,000 additional cash/financial asset earnings.</p> <p>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?</p> <p>In addition to those significant financial issues, land also can be contaminated, undevelopable or have significant development restrictions, among other issues.</p> <h3>Who might consider land?</h3> <p>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 <a href="http://www.zillow.com/las-vegas-nv/">Las Vegas</a> for the weekend (where, by the way, many an investor has learned some tough land investment lessons in the past decade!).</p> <p><strong>Related:</strong></p> <ul> <li><a href="http://www.zillow.com/blog/2012-09-21/is-a-second-home-a-good-investment/">Is a Second Home a Good Investment?</a></li> <li><a href="http://www.zillow.com/blog/2011-08-08/investing-in-real-estate-what-is-a-good-deal/">Investing in Real Estate – What <em>I</em>s a “Good Deal?”</a></li> <li><a href="http://www.zillow.com/blog/2012-09-28/investing-6-types-of-properties-to-pursue/">Investing? 6 Types of Properties to Pursue</a></li> </ul> <p><em>Leonard Baron is </em><em><strong><a href="http://www.professorbaron.com"><em>America’s Real Estate Professor</em></a></strong></em><em><strong>®</strong></em><em> &#8211; his unbiased, neutral and inexpensive <a href="https://www.createspace.com/3832871">“Real Estate Ownership, Investment and Due Diligence 101”</a> 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 <a href="http://professorbaron.com/">ProfessorBaron.com</a>. </em></p> <p><em>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.</em></p> </div>
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