3 Profit Strategies Investing in Land
Land is one of the most enticing real estate investments. I'm sure we have all driven by an empty lot and a few years later see a new development built on it, and wonder to ourselves, "I should've bought that" or "I could've built that." With land typically priced significantly lower than a home, the prospect of buying land and waiting for the market to increase its value is enticing.
Yet, land comes with its own set of challenges and not all empty parcels have the same potential to generate huge returns. One of the most impactful variables with land is opportunity cost. Will you make huge returns buying and holding onto land? Or could you make larger returns investing in flips and buy & holds, or even the stock market? In this post, I’ll go over my first-hand experience with land and how having several exit strategies can ensure that you turn a profit when investing in land.
In May 2015, I bought an empty lot in Stockton, CA, a 12,000 square foot empty land parcel. When I was a kid, I remembered a church once occupied the lot and had since been removed. I learned that the lot was for sale through an alert I set up on Zillow.
Understanding that land does not increase in value in the same way a home does, I immediately thought of all the exit strategies possible prior to submitting an offer. After inspecting the empty lot on Google Maps and in-person, I realized three opportunities to profit:
First: Subdividing. The empty lot was equivalent to 3 single family home lots. After calling the city’s development office, I learned that it could be subdivided. With empty lots averaging $20,000 for a 4,000 square foot lot, the total potential profit was $15K based on the $50,000 listing price.
Second: Reselling. The property was only listed on Zillow; a physical sign was not put on the actual property. I knew that just putting a physical sign on the property would open my listing up to a larger market of buyers. In addition, the thought of subdivision was not mentioned on the Zillow listing which led me to believe prospective buyers did not know this was a possibility.
Third: Development. While I had never done home construction before, my uncle was a home development contractor who initially agreed to help me. He estimated the cost for development of a 3 bedroom 2 bathroom to be $175K and homes this size were averaging $200K at the time, implying a $25K profit per lot or $75K in profit for the three lots.
With so many strategies to make money, I felt confident about the purchase and I acquired the property in May 2015 for $45K in cash. Less than a year later, I was able to sell the lot for $65K, earning a $20K profit and providing me more funds for my next deal. When listing the lot for sale, I made sure there was a physical sign on the lot and ensured the online description called out the opportunity to subdivide.
To recap, for residential land purchases, there are three exit strategies that can help you turn a profit:
Subdividing a parcel into smaller parcels.
Reselling with improved marketing.
Developing the lot through construction.
For the first time investor, purchasing land can be scary, but analyzing a property prior to purchasing can reveal several opportunities to make money. Whether you subdivide, resell, or develop the land, having multiple exit strategies helps you to be flexible in case any of the three do not work out.
