Real estate can be a great investment, and land development investments are among the strategies that have the highest returns. There are several investment strategies that can be used in order to profit from land speculation. Land development is often regarded as an enticing investment proposition because it can be sold for a much higher price than it was acquired.
What to consider before speculating on land development?
Before you jump into a land development investment, you want to make sure you analyze thoroughly a few key points that will define how much you can profit from this investment.
Research the demographics
Make sure that you research the demographics of the location you are thinking of investing in. Knowing the number of people that are living in that area. Is it growing or is it declining? You want to make sure that the number of people living in that urban area is increasing.
It is also important to know how many people are moving yearly to the region. The influx of new inhabitants should give you more insights into how the region is developing. Knowing why they are moving is another important aspect that should be understood.
Another important factor to consider is the local birth rate. Ideally, a location with a high birth rate is usually a great sign. That means that there could be more demand in the future for housing in that location. However, a high birth rate sometimes does not necessarily mean that it is an attractive location. The birth rate might be high, but people might be moving away from that particular location.
Research the real estate market
Once you have analyzed this you should start researching the local real estate market. Is there a housing shortage? How many dwellings exist for each local inhabitant? These questions should help you to figure out how the supply side of the local real estate market works.
Moving on to the demand side, try to talk with a few real estate agents to understand what the demand for housing in that region is like. How many deals are they closing every week or every month? This should give you a clearer picture of the market.
It is also important to consider the average price per square foot, as well as the construction cost per square foot. Both of these indicators are helpful for you to estimate the cost of building and the difference between building and buying used properties.
Another aspect to consider is to know on average how many properties the locals own. This will give you a good insight into how many properties could be up for sale. When it comes to estimating supply on real estate it is important to consider that because a certain property is not for sale does not mean that there are supply constraints. This is reminiscent of the Great Financial Crisis and how the real estate market seemed to have a very low supply.
All this information is crucial to get a clear idea of end values from which you can reverse engineer the construction costs and land value to get to a profit margin," comments James Durr UK real estate auction financier.
Analyze the local economy
Finally, consider some economic aspects. What is the average or median income in the region? What is the savings rate? Are locals inclined to invest in real estate? These questions should help you figure out exactly if this land development investment is worth it or not.
It should also be considered the size of the city or location you wish to invest in. If there are not a lot of people living in that region, you should research further. Understanding how the local economy works could give you even more insights into the potential risks. Knowing what is the most common job people have, or the type of businesses that operate there is also important to know.
Land development investment strategies
Once you have researched all of the key aspects of the region you wish to invest in, now it is time to choose a strategy. There are several investment strategies that can be implemented to profit from development land speculation. However, you should choose a strategy based on the research you have conducted. Some of these strategies may not work as well depending on the characteristics of that location.
Consider peripheral land development
Land that is located in peripheral areas of a city, or urban development is often the main stage for land speculators. As the city grows and the urban area expands, this land becomes highly desirable to develop properties. This is how suburbs were initially created. To use this land development investment strategy you do not even need to develop the land. As long as your research is sound, and the price you paid has enough margin this strategy tends to pay off.
It is important to consider the rate at which the area is expanding. It is also important to choose a location where there is a low housing supply. If these two conditions are met, your potential returns will also be higher, and the risk will be lower.
Divide into lots
Another approach that tends to be popular is to buy a piece of land and then divide it into lots. This allows them to charge a much higher price per square foot. Families looking for their own suburban house will be considering lots, as opposed to a larger piece of land. This is a good strategy depending on the type of buildings in the area. If they are mostly single-family homes, dividing your land into lots might be a good solution.
What is good about this land development strategy is that the number of potentially interested buyers in a lot is much higher than a large piece of land. A large piece of land for development will often attract a few development companies. This makes the universe of potential buyers much smaller. For this type of land development investment strategy, you should consider the local legislation. Make sure that you can easily subdivide a piece of land. This will certainly generate a hefty return.
Get a project approved and sell it
This is perhaps one of the fastest ways of flipping land. It is also one of the simplest, depending on the legislation involved to get a project approved. Essentially you will be looking for land that you can then get construction and architectural project for. This will add a premium to value. With the project in place, you can then turn around and sell it for a heftier sum.
It does not require a developer to do this sort of land development investment. However, having the necessary knowledge regarding construction, architecture, and planning, as well as the legislation associated with getting a project approved, is a must. It can also be advantageous to have some contacts in the industry that you can reach out to, and advise you in case you do not have the necessary experience to take on this task on your own.
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