The raw land development process is often viewed as a complex investing strategy—one that only “experts” should consider taking on. While investing in undeveloped land is a complex strategy, beginners shouldn’t necessarily avoid it. In fact, I would argue that new investors can successfully invest in raw land if they mind due diligence and prepare for more work than what usually accompanies traditional exit strategies. If for nothing else, developing raw land comes with more steps.
There is no shortage of opportunity in the real estate industry as an investor. The real estate industry offers scores of options investors can pursue from investing in residential, multifamily, and commercial properties. One of the more under-utilized investment opportunities is raw land investing, and there is no reason to ignore it anymore.
What Is Raw Land Development?
Raw land development is the process of purchasing a parcel of land with the intent of either developing and building on it or holding onto it for long-term appreciation. Raw land investing has an array of configurations but will essentially provide a multitude of advantages from other types of investments; whether it be from selling the property, renting it out for passive income, or simply earning appreciation while performing little to no work.
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The Raw Land Development Process: How To Develop Land In 6 Steps
The fact of the matter remains: undeveloped real estate has the ability to deliver the same consistent cash flow as any other type of investment opportunity.
Fortunately for investors, raw land is a limited resource, making it extremely valuable. If you purchase land in an area headed towards development and growth, there’s a chance your land can become worth even more.
Investors looking to develop raw land should mind their due diligence and thoroughly educate themselves on the market where they plan to invest. The best way to do so is to pay attention to market trends.
If you can track the market’s cyclical movement, you will better understand when to buy. You must first examine the recent developments in your selected market. If there has been a recent surge in development projects in the area, buyers will likely be looking for land. It is also wise to look at the growth in surrounding markets.
Now that you have an overview of raw land as an investment, we’re going to go through the raw land development process step by step:
Evaluate its economic feasibility
Determine the offer price
Find out what the land is zoned for
Secure your financing
Begin building within zoning laws
Market the land/property to sell
1. Economic Feasibility
The first step of raw land investing is to determine its economic feasibility. Like any real estate investment, it’s critical to determine your desired return on the property before getting started. This is important because it will lessen the market’s uncertainty and provide a model of your investment’s costs versus profit aspect. Although the numbers will be an estimate, understanding your project’s feasibility, including the estimated costs, revenue, and overall return, will help investors succeed.
Once you understand the costs you’re likely to encounter—including what you should receive in return—you can better determine the offer price. Investors need to have contractors submit actual bids for the project at this stage of the process. This will not only provide estimated costs for the project, including the numbers of what you’re expected to spend, but also a max offer price.
Stage three of raw land investing deals primarily with the design of the land. In essence, this pertains to what type of property should be constructed on the parcel, including looking into local zoning codes.
Depending on the type of property you’re looking to construct, or how you intend to present the property to buyers, zoning will play an important role in how you proceed. Zoning codes will essentially determine what types of properties—whether single-family, multifamily, condominium, or commercial—can be built on the lot. As an investor, this could ultimately hinder your investment approach. When getting started in raw land investing, it’s vitally important to understand the area’s zoning laws.
Like all real estate investments, how you intend to use the property will dictate the type of financing you obtain. The one aspect investors should care the most about is the loan-to-cost ratio (LTC). In essence, the LTC is the amount of money the lender will provide for the project, which will generally depend on the type of construction and use of the property. Although most lenders will only provide a percentage of the overall costs (generally between 80-85 percent), owner-occupied homes are eligible to get standard bank financing.
The second-to-last stage of the raw land development process is construction. In most cases, this will consist of horizontal development—like grading for roads, curbs, and utilities—and eventually building the property from the ground up. One element investors also need to be aware of is the construction financing aspect of the project. Generally speaking, contractors will be paid in increments of duties performed, including phases of the project. In many cases, construction lenders will hold approximately 10 percent of the construction loan until the project is completed.
[ Check out our guide about how to get started with constructing new build real estate on your land development to learn more. ]
The final step to the land development process is marketing. This is where stage one is of critical importance. Researching the neighborhood, the market price, and demand for rentals will pay off when determining your marketing strategy. Investors should also have a marketing plan in place to attract buyers to the property. This may include working with a realtor, online listings, the MLS, advertising in newspapers, and even social media.
Top 5 Benefits Of Developing Land
The attraction to the land development process is easy to see: this undeveloped asset not only costs less to purchase than a developed lot but also is generally less expensive to own over time. There is more to like, however: it offers appreciation potential whether or not the vacant area is improved upon. While there are many risks and rewards in real estate investing, raw land is one of the more secure investments to make.
This is what experts at Precondo have to say about raw land: “Investing in raw land allows people to develop it according to their needs and wants. The cost of raw land is lower than that of developed land, which entails greater profits for investors. Investors can purchase raw land and then sell them as plots. It offers them more opportunities and profits and helps them build a great portfolio”. To gain a better understanding of the investor appeal, here are the five main advantages of raw land development:
Raw land investments are typically less competitive than residential real estate
Sellers of raw land investments can be more likely to finance
Purchase price and holding costs are lower with raw land
The appreciation potential can remain high even with less than stellar market conditions
There are countless development opportunities for raw land
1. Less Competition
Unlike regular real estate investments, which are currently experiencing higher-than-normal competition in most markets, raw land has virtually no competition to deal with. In most cases, investors are looking for established properties, such as residential or commercial properties, that provide an immediate income source. Unless optimized to do so, undeveloped land will generally not earn income regularly.
2. Opportunity For Seller Financing
Raw land investments award owners more opportunities to use seller financing. Since traditional lenders (i.e., big banks) are often more hesitant to loan money for vacant land, you—as the landowner—get to act as the bank. If someone is in the market for raw land and can’t acquire a loan, you can lend them capital but charge them higher interest rates. This is a win-win situation for every party involved.
In comparison to acquiring a developed property, buying raw land is relatively inexpensive to acquire and own. It has minimal carrying costs, including lower property taxes and insurance, but maintenance costs are modest. In fact, performing maintenance on undeveloped land isn’t required, as a vacant lot can be purchased and held on to until appreciation rates reach a level where it can be sold for a profit. Also, undeveloped landowners are generally highly motivated to sell because they are typically absentee owners with little-to-no emotional connection to the property. That said, the right property can provide an immense upside for investors with a strategy in mind for the land.
4. Appreciation Potential
Arguably the biggest benefit of investing in raw land is its appreciation potential. Even in times of economic uncertainty, raw land is a hard asset. Since land is such a scarce resource, it will always be valuable, even if market conditions are rough. Raw land will always be needed, regardless of whether or not it holds economic value. On the other hand, if the economy is thriving, there is a higher probability that your land’s value will appreciate. As land continues to be developed, vacant property becomes harder to come by. Consequently, the vacant land leftover becomes more of a commodity, especially in a popular area.
5. Development Possibilities
As an investor, the allure of raw land investing is in the opportunity it holds. Aside from earning long-term appreciation, the land can be developed into further possibilities, like a single-family home, multifamily property, or condominium. Although zoning and building codes may limit an investor’s opportunities depending on the location, raw land offers investors the ability to choose and develop their own investment path from scratch.
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How To Develop Land: 5 Pro Tips
Raw land development is not for the faint of heart. The process can require extensive time and research, especially when compared to traditional residential investment. However, as I mentioned above, the right preparation will make a raw land investment well worth it. Read through the following tips on developing raw land before you get started:
Learn To Calculate Holding Costs: If you are making the jump from one investment strategy to another, make sure you understand the differences in holding costs. Building and zoning permits take time, meaning it may be a while before your raw land investment begins generating its own cash flow. Make sure you are prepared for the “in-between” stages by accurately calculating the holding costs associated with raw land, particularly when it comes to loan repayments.
Keep Your Finger On The Market Pulse: The savviest investors will know if and when to start a raw land development, and with the right research, there is no reason you can’t either. Conduct a full market analysis before entering a raw land deal and monitor conditions over time. It is even a good idea to pay attention to other land development projects in the area. By doing so, you will know when to start (or finish) your raw land development.
Understand The Potential Risks: Despite the many benefits of raw land developments, this strategy is not without risk. Several worst-case scenarios can and do happen. For example, you may start a development project only to discover it is actually located within a flood plain. The only way to mitigate potential risks such as this is to complete as much research as you can before entering a deal. That way, you are prepared for any obstacles you do encounter.
Watch Out For Time Consuming Zoning Issues: Depending on your plans for the land, it may need to be rezoned. This requires a fair amount of paperwork and, in most cases: time. The best way to avoid this waiting game is to plan out what you want to do with the property before you actually purchase it. This will allow you to make an informed decision either to commit to the zoning process or move on to another investment. Let me be clear: rezoned developments can be highly lucrative, as long as you account for the process beforehand.
Work With Professionals: Real estate investors can’t know everything or be in every place at once—no matter how much they might want to. When it comes to land development projects, you must have a reliable, skilled set of professionals to help your project. This applies to anyone from construction workers to contractors to project managers. Raw land development requires a big team, so make sure yours is as good as it can be.
5 Important Factors In Raw Land Development
When it comes to raw land development, investors essentially combine multiple investment strategies into one: purchasing land, building new construction, and renting or selling the final product. This deal type’s complexity will demand a significant amount of planning from investors before they ever even purchase the property. Do not let this intimidate you, as there are ways to systemize the process and make it easier to navigate. Investing hoping to prepare should research the following factors, so they know exactly what to look for (and evaluate) when developing raw land:
Permits: Permits are required for almost any type of construction, development or renovation. When developing raw land, it is crucial to research the permits required for these projects and the anticipated costs and timelines of obtaining said permits. Many investors underestimate the amount of time permitting can take and should be careful to account for it when searching for and financing raw land developments.
Zoning: Depending on where the land is located, it will likely be in a designated zone, whether that is commercial or residential. Land can be rezoned in some cases, but it is important to add that into your potential timeline for a given deal. It is also important to note whether any potential land investments are located within a protected wildlife zone, flood plain, an area with building restrictions, etc.
Building Department: There are certain building requirements to take into consideration when planning any new construction project. These are often regulated by the city or locality in which the area is located and could impact plans for the building. Do not simply rely on others (such as your builders and contractors) to abide by building codes; familiarize yourself with them as well to be sure any project is planned properly.
Water: Water and sanitation are two of the most important aspects when planning a raw land development. Investors should determine if there are existing hookups or water and sewage lines on the property and go from there. During this part of the process, you must research local requirements as there are several regulations around installing and operating water lines for a property.
Electrical: Last but not least, investors need to consider power not only for the future building but for the construction process as well. If there are not existing power lines to the land, you will need to contact local utility companies to start the process. Additionally, do not forget to consider cable, phone, and internet lines as these are also crucial aspects of land development.
10 Things To Consider Before Developing Land
The extra steps required of investors to successfully develop land extends beyond finding and purchasing it. There are several factors that investors will need to consider every time they evaluate a piece of land. While it may seem intimidating now, these elements will become second nature over time. Until then — review the following things to consider before developing raw land:
Engineering: A crucial aspect of the raw land development process, particularly early on, is to have any plans reviewed by an engineer. Some real estate investors may have a background in this field, but it is important to find a qualified engineer to work with. These skilled professionals will integrate all portions of a property development plan and determine its feasibility. This means considering earthwork, utility hookups, infrastructure, and other amenities. In some cases, the master engineer can even find areas to reduce costs in the overall development.
Understanding The Land: Anytime you are considering purchasing or developing a piece of raw land, it is important to visit the site. Like traditional investment properties, a walkthrough can reveal aspects of the land you may not have noticed. Walking the area could uncover hidden amenities, unique landscaping, accessibility issues, or even existing power hookups. These surprises could impact the purchase price, development process, and viability of the land. It is always a good idea to walk around the area to ensure you find any surprises, both good and bad, that can come with purchasing raw land.
Spatial Awareness: One of the most important pillars of successful raw land developments is spatial awareness. When purchasing raw land, you need to understand how to maximize its use and profitability. This often comes down to understanding the best ways to utilize the plot, whether residential or commercial. Keep layout, storm management, and transportation in mind as you map out development plans — these will help you optimize for livability and usage.
Tasks, Roles, & Responsibilities: You might be able to get away with a one-person team when working in residential real estate — but even under perfect scenarios, that is not the case when developing raw land. Investors should expect to work with several other professionals throughout the development process. Take time to find the right people for your project, communication style, and business goals. Outline and divide responsibilities as necessary — proper management will help you keep your project on budget and on time.
Start From The Outside: When it comes to new developments, investors should quite literally plan from the outside in. This means designating lots and structures before planning the specifics of the buildings. By doing this, you can focus on reducing the amount of earthwork and grading required and even take advantage of the natural layout of the area.
Streets & Roads: While streets and transportation are a critical element of developing land, these elements can wait until much later in the process to be planned. This is because developers typically need to focus on maximizing land usage and livability (specifically in residential developments) first. Ideal street and road locations will likely arise as you plan the rest of the development — so try to avoid focusing on this task first.
Topography: If there is anything to take away from the land development process, let it be this: pay attention to the features of the land. Topography is crucial for understanding the characteristics of the land and strategizing its usability. There are great resources out there to map out property developments and work around the geographic elements of an area. Make use of those available to you and your team to ensure you fully consider the topography of an area before purchasing land for development.
Be Creative: Raw land development can be a great strategy for investors who love full creative freedom on a project. With developments, you are truly starting from scratch on a property. While there can be obvious constraints due to budget, timing, or land availability, there is a lot of room to get creative when planning a new build. Don’t be afraid to explore new ideas or real estate technologies when planning a development — as unique features have the potential to really pay off when you finally start marketing the property.
Selling vs. Renting: Traditional land developers often decide to buy raw land, build property on it, and then sell immediately after construction is completed. This strategy allows developers to make a fast profit from their project that covers the cost of construction. However, developers can also choose to hold onto their new construction and rent out their land. This allows for a long-term stream of income. Although it may take developers a long time to earn back the money spent on construction, they may end up with a larger profit in the long term.
Go With The Flow: Your first development project will be great experience, but in most cases you will not be able to replicate it exactly. Remember that each development project comes with unique opportunities and challenges. Pay attention to unique market trends, which can change from year to year. These will impact buyer demand and give you guidance on the right way to build. Go with the flow from project to project and stay up to date on the market, this perspective will help you be successful long term.
If you are looking for a profitable real estate investment strategy, it may be time to study the raw land development process. Investing in land is a great low-cost way to expand your real estate portfolio. Follow the steps outlined above if you hope to achieve success with raw land development. Remember to rely heavily on research as you venture into this investment strategy. Always consider how the area could change and develop your investment accordingly. Separate yourself from the competition today and add a raw land investment to your portfolio.
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