To many retirement savers, the term “real estate investment” conjures up images of buying or investing in apartment buildings and commercial developments. While those are certainly popular and common types of real estate investments, they’re certainly not the only options available.
One of the oft-overlooked possibilities for potential real estate investors is buying undeveloped land; that is, land that has not yet been built upon or developed for any specific or particular purpose. Here are some tips for considering this type of investment.
Make Sure You Have a Long Investing Timeframe. One of the common characteristics of any investment in undeveloped land is that the investor should have a long-term investment outlook. Undeveloped land is almost always purchased with an eye towards a significant capital appreciation that occurs only after many years. Make sure that your investment strategy supports a long wait before investing your self-directed IRA into undeveloped land.
Short to Medium Term Leases. Fortunately, your long term investment property does not have to remain vacant or otherwise unproductive as it appreciates in value. In rural or mountain areas, for example, a landowner can often enter into short or medium term leases to allow their property to be used for grazing or other agricultural purposes. In an urban area, undeveloped land can often be put to productive use as a parking lot or other revenue generating use. Just be sure that any interim use complies with the applicable zoning rules and regulations.
Validate Your Investing Assumptions. By the same token, if you’re buying a piece of undeveloped land with a specific future use in mind, you need to understand any zoning limitations that may apply to the property. Don’t automatically assume that you can buy a plot of land and eventually build a home on it – the property might not be zoned for residential use. Not validating your assumptions can greatly detract from the future profit you realize on this type of investment.
Buy an Undeveloped Parcel in a Subdivision. Another way to profit from undeveloped land is by purchasing property that’s part of an existing subdivision. Often times a developer will create a properly zoned subdivision and sell individual parcels to prospective homeowners. As homes are built, the value of each property tends to rise. A savvy investor can profit by purchasing land early in the process, then waiting until the development is nearly finished before reselling or building on the property themselves. Just make sure there are no covenants that require you to build within a certain period of time (or that you’ll be able to meet them).
Develop Your Dream Retirement Property Step by Step. Finally, you might be able to secure the land now, and then build in five or ten or more years, after you have accumulated the funds to do so. This could end up involving a much lower commitment of financial resources compared to buying a finished property, and end up generating a fairly significant effective investment return.
If you have any questions about how you can use your IRA assets to invest in real estate, contact Quest Trust Company.
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