Recently some friends of ours reached out to us with a proposition. Would we be interested in buying about 100 acres of raw land? That inspired this piece on whether you should invest in raw land.
Traditional Real Estate is Hard to Diversify
I wrote not long ago about our interest in investing in real estate. That piece was heavily focused on the purchase of crowdfunded real estate. In essence my conclusion was that an investment in developed land would be too concentrated in a single asset for my portfolio diversification goals. As such crowdfunding was the way I was leaning for the non-stock market real estate portion of my portfolio.
Raw Land Allows For Diversification
But then a family friend approached us with an investment opportunity in raw land. So am I now the owner of 100 acres in southern Georgia? At a rate of under 2K an acre it’s cheap enough to allow diversification for small lots. But is it the right investment for us?
Well, no. Cutting to the chase I didn’t buy 100 acres in Georgia. I made this decision specifically related to this particular plot. However, in general, I also don’t want to invest in raw land. My rationale might be of interest to you the reader.
Buying Raw Land as An Investment Versus Vacation Property
So let us start with the specifics. Our friends have bought land in southern Georgia as sort of a vacation property. They live nearby and purchased a 100-acre property to camp and drive 4 wheelers on. The raw land is undeveloped and wooded. So they did not buy the land as an investment so much as a getaway. They asked us if we would be interested in buying the property next door.
We, on the other hand, live almost 700 miles away from south Georgia. While I visit down that way about once a year I can’t regularly use such a getaway for vacation. Not to mention I don’t even own a 4 wheeler. So what rationale might make sense for our friends does not for us. Instead, anything I am looking at would be an investment.
Is Undeveloped Land a Good Investment?
But is raw land a good investment? Well here is where the rubber meets the road. If you look at real estate simply as an appreciating investment its returns are pretty poor nationally. Once offsetting for some regional booms and busts the data basically says appreciation keeps up with inflation over the long haul.
That rate of inflation is a pretty poor return when compared to what you can get from other sources, potentially with less risk. You could even buy something like I bonds at a worse case and beat inflation by a few points. So just buying a piece of raw land and waiting for it to appreciate is probably a poor strategy?
How poor you ask? We know at least 4 couples that have purchased raw land as an investment with the hopes of appreciation. They are 4 for 4 in being stuck with underwater investments they can not unload. These properties are spread all over the east coast. Admittedly that is a small sample size, but the data backs up the observation that buying a piece of land and sitting on it is a poor investment decision.
How Do People Make Money on Real Estate?
So how do people actually make money on real estate if sitting on it waiting for appreciation sucks so bad? Well, it comes down to two things. One is whether the land provides any source of revenue while it is appreciating. Perhaps rent, timber, crops, or something else. Inflation plus operating revenue can equal a solid return.
However, this property in Georgia is nowhere near crop ready since it is wooded. At best it might provide timber at some point in the far future. But, honestly, I have no knowledge of timber as an investment nor the time to do my diligence here. As you might recall I strongly believe I should never invest in something I don’t understand. Therefore I can not judge the properties value based on its timber potential. I am forced to ignore this potential.
Change in Land Use
Anyway, the second way to make money on real estate is through a change in usage either of the property or the surrounding area. Say they build a city transit system nearby or a big business moves in. Or perhaps you tear down all the trees, build housing, and then resell it.
Again though this property in southern Georgia does not fit the bill. No one is building a subway to the rural south. It’s also unlikely you can build a subdivision in the middle of nowhere. This is not field of dreams you build it and they will come. Not to mention I am not a real estate developer. So again investing in things I don’t understand comes to mind.
Only Purchase Raw Land If You Have A Near Term Plan
In essence, I cannot assign any value to operating income or change of use to the property. With the value of appreciation expected to be so poor I just can not justify purchasing raw land as an investment. Does this mean I will never purchase raw land?
Well, the answer to whether I will ever purchase raw land is a little murkier. If you buy real estate you very well better have a plan for it’s use/investment cycle. Most of those 4 friends I mentioned above bought with some nebulous long term plan. Look how it turned out for them.
I could see us building a retirement home somewhere in the middle of nowhere in the far future. But note the wording here, far future. The reality is anything you purchase you have to pay property taxes on. So a purchase now would just mean a drain on our income until we figured out what to do with the land.
Given situations change there are no guarantees even when the time comes we’d want to live in Georgia. So buying early would just end up costing us more for something we still may never use. So I guess my point is, I never say never. But it would be foolish to purchase raw land now just in case of a future need without a real plan.
Are you invested in raw land? Would you have bought the property?