Covered land play is a strategy investors use when they foresee a better use of land than the current situation, or in other words, converting property to its highest and best use: for example, a car wash occupying what could be a mixed-use development. When covered land play investors see land that's no longer being put to its best use, their interest is piqued.
What covered land play investors are really after is the land that gets them into a particular location, but some type of structure is already sitting on that land. They buy the property anyway, using the structure for whatever it's currently being used for but with the goal of tearing that structure down someday and either building something new or selling the land to someone else, perhaps a developer.
Some businesses that could be ripe for a covered land play include:
All these businesses take up a lot of space, and growing areas might not be able to afford so much land going to those types of businesses anymore. Plus, those businesses are all fairly low-maintenance to run.
Covered land play vs. buying land
Lots of investors buy land. But a covered land play has the potential to be an even better investment. Why? Because land with nothing on it doesn't bring in any cash flow dollars, but if there's already a money-making business sitting on that land, like a car wash, you can potentially make money running that car wash until your true plan can be realized. It would behoove the savvy investor to first find out whether that car wash (or whatever business is there) is actually making -- and not losing -- money.
Remember, there are property taxes to be paid and often a mortgage loan, whether there's a business sitting on the land or not. There's nothing to offset expenses with a land investment as there is with a covered land investment. In fact, that's the reason for the name of this type of investing: The word "covered" refers to the money the business makes -- it should be enough to cover expenses and carrying costs.
To make money on a covered land play deal, like with most successful investments, the investor needs to see potential. Maybe that car wash or whatever is located on the outskirts of town. You think that area will develop someday. Some clues could be population and job growth trends, which could indicate a possible need for an apartment building or a mixed-use development there instead. An announcement of a toll road coming could indicate retail and restaurants would soon follow.
But all this is just speculation. In other words, the time hasn't yet come. So covered land play investors table the future deal until the time is right, collecting money from the current business in the meantime.
Another reason that would cause a covered land investor to wait might involve government red tape. You'll most likely need approval from the city for the type of project you wish to do. While waiting for the approval process -- which, depending on the jurisdiction, could take awhile -- you're earning money on the current business.
What if the potential never materializes?
Being wrong about an area or having the city turn you down are the risks in this type of investing. But if either happens, although it's not ideal, you at least still have a money-making business on your hands.
The way you'd really lose would be to overpay for your covered land play deal. That can easily happen when not only you see the potential in an area, but the seller does as well. And because you both think the land that business sits on will be profitable someday, the price to buy could be high. Like with anything you buy, if you pay too much, you'll likely lose money on the deal if you can't sell the property for at least what you paid for it.
A word on infill properties
You'll generally pay more for infill properties in urban areas than for something on the outskirts of town. If there's already apartment buildings and mixed-use developments all around that car wash, for example, you'll likely pay a premium for that deal since the area has already transitioned. Buying on the outskirts of town is riskier, since the area may never develop, but it will likely be less expensive to buy out there.
The Millionacres bottom line
Commercial real estate investors might want to be open to covered land play deals if they have some knowledge about future development. There's low risk since you're buying a money-making business, and there are huge upsides if you predict correctly about the area's potential.