Investing in land is one of the biggest financial decisions a person can make in their lives - but is land development profitable?
Land development can be an extremely profitable investment depending on the location, the market trends of the local economy, the condition of the property, as well as the intended use of the land. However, developing land comes with a level of financial risk - much like any other investment.
Whether you are looking to buy a property for your private residence or are interested in getting into the real estate game, investing in land developments can be some of the safest and most reliable ways to invest your money. The primary reason for this is that market trends for property values tend to show a consistent increase over long or even short periods of time. With that being said, you are going to want to be sure that you are aware of all aspects of your land development so that you come out ahead in the profit margins. Let’s take a look at how land development can be profitable.
Land development projects in the United States will be regulated by your local city government or associated land trust. To ensure that your land development is within all legal zoning rights and restrictions, you should be sure to consult your local building authority before commencing and developments.
Table of Contents
How to Make Land Development Profitable
Land developments tend to have a lot of popularity with real estate investors and even private residence owners.
The best way to ensure that your land development is going to be profitable is to understand the ins and outs of real estate and what property features to look for when hunting down land. Before you even begin assessing real estate, you should try to have a clear idea of what your land development goals are.
Once you have a clear goal in mind for your land development, you will want to consider what your budget is in relation to acquiring your ideal property. What your budget can afford will greatly influence all other factors of your development and may significantly affect how profitable your land will become.
After establishing your budget and your property goals, you can begin to approach the real estate market with a foundation for your search. To mitigate the level of risk involved in real estate investments, we are going to take you through everything you need to know so that you can make a wise and profitable decision in your land purchase. Here are the factors you should consider.
The bottom line is that location is everything! This is the most important factor to review when hunting down property and it will greatly influence how profitable your land development is in the end. The primary reason for this is that a property’s location tends to be the most appealing selling point for most buyers, which drives property values through the roof in some cases.
If you are a real estate investor and are on the market to flip properties for a quick financial turnaround, finding a good location for land development should be fairly straightforward, as market trends are easier to predict in these situations.
However, if you are interested in making land development profitable as a private property owner over a long-term investment, you may want to carefully consider the direction your property value will go over a longer period of time.
Let’s take a look at what you should consider when reviewing the location of a property.
The local economy of an area is crucial for determining the worth of a property’s location, as well as the likely direction the market value of the land will follow in years to come.
The reason for this is that a location with a thriving economy will tend to drive the cost of living up, which significantly increases the price of land - making profitable developments a sure thing.
On the other hand, a location with a declining economy is a sign that property values will be decreasing and that land developments are probably not a wise investment.
A successful local economy also comes with a lot of other locational benefits which drive up the cost of land. If an area has a thriving economy it will likely have a better-funded education and schooling system. In addition, you will find that these areas tend to have a lot of other attractive amenities which encourage quality of life.
With that being said, to ensure that your land development is profitable, carefully assess the local economy of the location you are considering.
Land developments that are located in places that have a natural aesthetic will have a significantly higher dollar value. For many buyers, living in a place that has attractive natural features can be a huge selling point, which can make your land development much more profitable.
The natural aesthetic features that a buyer may be looking for will vary depending on the location of the property, which is why you want to be sure you are developing in an area that will appeal to most people.
In most cases, this could be developing on land located in an area that has a lot of natural surroundings such as lush greenery and perhaps even a view of a scenic landscape. In other settings, it could mean developing in an area that is surrounded by skyscrapers or an iconic monument.
Regardless, the aesthetic of your development project can make a huge difference in how profitable your land development will be.
In the modern age, most people tend to be more attracted to land developments that are located in cities. In general, cities will have more jobs and are more reliable for financial security, which is a primary reason that developing in urban environments is an all-around safer bet.
You will also find that most urban environments allow for a more practical way of life with accessibility to everything from social circles to basic amenities such as:
- Bars & Restaurants
In addition, (as mentioned above) the local economy of an area is a crucial aspect of finding a location for developing land that will be profitable. You will find that urban environments tend to have a much more stable job economy and are more flexible for employment opportunities, which attracts a much wider range of buyers.
With that being said, you can not always rely on a city to have a solidified local economy. It is possible to find cities that are declining in their economy - in which case, you may want to be wary of developing your land. Always assess the market trends of an urban environment to ensure that its local economy shows growth and stability.
Finding and developing land projects which are profitable in rural areas can prove to be more challenging than urban environments.
The primary reason for this is that job economies tend to be weaker and less predictable, but also these areas tend to be more remote with less accessibility to standard goods and services. If you are considering pursuing a profitable land development in a rural area, you should carefully weigh out the direction the property value will go over a long period of time.
With that being said, if you cater your land development to a specific buyer, you may find that developing in a rural area can be just as profitable as in a city. Many buyers actually want to escape the busyness of the city and move out to the countryside for some peace and quiet, which is why the natural aesthetic of an area can be a huge selling point for many people - regardless of the local economy.
You will find that pursuing your development project located in a rural area can also have more flexibility, as there may be much less real estate competition and that your build may cost you a fraction of what it would in an urban area due to property costs being lower.
A major factor that determines how profitable your development will be is based on what you intend to do with your land.
After reflecting on your overall goals and financial budget, you will find that your land intentions will generally suit one location better than another. To understand this better, let’s take a look at how your land intentions will affect the profits of your development.
Residential properties are some of the most versatile and reliable ways to profit from land developments.
The reason for this is that residences can be profitable regardless of their location. However, you should note that choosing the right location can make a huge impact on your profit margins, as well as financial assurances.
The most common residential developments which show reliable profits are within urban environments. Cities tend to have a lot of residential flexibility - with real estate being available within central districts, as well outer suburbs.
This is a huge selling point for the most targeted buyers on the market - families, as they tend to know what they are looking for and are interested in acquiring properties that are in attractive areas.
Your development can be especially profitable if it is located in a rising neighborhood, which has good access to schools and other amenities.
Developing a residence in a rural area comes with more uncertainty, as living in a more desolate area tends to be less appealing to most buyers.
This is due to a lack of access to services and lengthy commutes to reach most jobs.
However, you will find that residential developments in rural areas also come with their fair share of perks. Land prices tend to be much more affordable, which means that you can allocate a lot of your budget specifically to the development itself.
This can be extremely advantageous for pursuing creative development projects that you would not be able to afford in a city or that you may experience building restrictions with.
Commercial Business Developments
Developing a commercial business, regardless of its location, can prove to be a very profitable real estate investment.
Urban Commercial Businesses
Urban areas tend to thrive more with commercial business investments, as these areas have much more demand and are in a more convenient location to be accessed.
However, developing a commercial business in a city also comes with a lot of imitations. Cities tend to be more confined and are limited in space. In addition, certain businesses are met with a lot more red tape than others when it comes to development.
To be sure that your commercial business is possible, assess the demand for your business service and analyze the local economy of the area.
Rural Commercial Businesses
In general, commercial businesses in rural areas need to be chosen carefully. Many business developments are not suitable for the countryside and will struggle in the profit margins.
The reason for this is that there is simply less demand for certain services and products in rural areas. Aside from basic amenities, most small towns lack variety when it comes to business prospects.
With that being said, there are still some great ways to develop a profitable commercial business on rural land. The most common business ventures that profit in these areas are industries, as well as large-scale businesses.
Rural areas tend to have less oversight and more space for development - at a fraction of the cost, which is why we commonly see warehouses, factories, and car dealerships outside of town. Carefully developing such a commercial business can prove to be very profitable.
The great thing about land development is that as a property owner you are able to have full control of what you do with your development.
Regardless of whether you are a real estate tycoon or a private homeowner, a great way to profit from your development is to utilize it as a rental property. This can often prove to be an investment that pays for itself, as you are able to start profiting from your land development before even selling it.
Urban areas tend to be much more reliable for development projects that are intended to be rentals - given that there will be a much higher demand for your land. You can establish a rental agreement with your tenant and collect your profits until you feel there is a great opportunity to sell your land.
However, rural areas are less predictable for rental agreements, as market trends climb or decline at a much slower pace and even stagnate in some situations. If you are considering a rural area for renting your developed land, you should try to acquire land in area that has some form of financial stability.
Property Condition & Re-Investing
When assessing land that is developed or undeveloped, you always want to do a thorough inspection of the property to know the overall condition of the land.
Here are some of the things you should assess:
- Property foundation
- Sings of erosion
- Utility access
- Building structure
- Road accessibility
The condition of a property can be a telltale sign of whether land development will be profitable or not. Many investment opportunities for land developments may tick all of the boxes such as location and budget but are simply more trouble than they are worth - due to the condition of the property itself. In which case, you are going to want to carefully weigh out your options.
If you’ve found a great deal on a plot of land that meets all other requirements but is simply in a poor state, the land development could still potentially be a very profitable investment. After reviewing your budget and the location of the property, you should analyze the issues the property has and evaluate what the cost would be to re-invest in the land.
A land development that needs to be refurbished with minor remodeling, could only require a moderate amount of re-investing. In which, case you could have a very profitable development on your hands. However, you should note that taking the time to remodel and re-invest in developments can require more work from your end and can be risky if your development project were to have further underlying problems.
The best way to mitigate risks in this situation is to have a professional land appraiser come to evaluate the condition of your property so that you can get a realistic figure of what the land is worth and what development costs you can expect to have.
Land development opportunities can often be misleading sometimes, as many of the ideal qualities we look for when assessing properties are there, but with underlying red tape, which is easy to overlook.
This is due to the various development restrictions that can be found on properties. A lot of land areas, regardless of their location, may have a number of different restrictions in place on them. These restrictions can be a huge problem for developers and can hinder building projects or even make them impossible in many cases.
With that being said, the level of restrictions that come with developments vary greatly and not all of them are overly regulated. To guarantee that your land development will be profitable, you are going to want to be fully aware of any and all development restrictions attached to your property.
Any real estate developer will tell you that zoning restrictions can cause a lot of headaches. Most states, counties, and cities have some form of zoning restrictions in place, which limit what kind of developments are allowed on certain land types.
This can be problematic for pursuing flexible business developments, as you may be required to determine specific land use for your property before you can begin any kind of building. This means that you will be locked into your development project permanently and will not be able to revision your project later on.
The most common areas that we see extreme zoning restrictions are in urban cities. Cities have far more regulations in place and are generally designed in a way to make the lifestyle of their residence more practical. With that being said, let’s take a look at some common zoning restrictions in urban areas:
- Dimensions - the height and width that your development may often be limited.
- Architecture & Materials - the overall design and materials used with your residence may be limited to what your city planner allows.
- Location - you will likely be limited on where you are allowed to establish businesses and where you are allowed to develop residences.
These restrictions will be different from each urban area and you will find that there are many cities that have relatively loose zoning restrictions that will not hinder your development plans or interfere with your profits.
A common reason that a land development loses value and becomes less profitable is if the property has an easement attached to it. Properties with this classification are rarely found in urban areas and are almost exclusively in rural environments.
An easement is essentially an agreement that a property owner has made with a land trust or government organization to relinquish certain development rights on their land. This occurs in a number of situations and based on the level of restrictions, the value of the land and any developments on it could decrease significantly.
The most common easements that make properties less profitable are conservation easements. These land agreements involve the property being under a certain level of environmental protection, which can greatly limit what developments are allowed on the land - if any at all.
With that being said, some conservation easements have relatively relaxed restrictions and can actually be acquired far cheaper than common lands, which makes these properties worthy of consideration.
Another type of easement that is commonly found is a simple restriction that a landowner has agreed to with the federal, state, or county government. More often than not, these restrictions do not interfere with making land developments profitable and usually entail a simple regulation such as allowing public access through a road that passes through the property.
About THE AUTHOR
Cameron Scott has been in the land development industry for over 20 years. During that time, he has worked on hundreds of development deals ranging from 5 acres to over 100 acres. Most of his work has been in Utah and Texas, where he has worked for large, national home builders as well as local companies. He has worked as Land Entitlement Manager, Land Development Manager, and most currently as Land Acquisition Manager.Read more about Cameron Scott