Considering a vacant lot to build a property on for your next investment? Building new residences or commercial property can come with great potential for return but requires a lot of forethought, starting with the right piece of land.
If you're considering ground-up development as a real estate investment, learn how to find the right lot to build property on here, including what factors contribute to a piece of land being the right buy -- or not.
Types of lots you can purchase
Developing land takes considerable permitting and effort, so beyond location, consider the readiness of the lot. There are generally three types of lots, each with benefits and drawbacks, you will see advertised:
- Raw land: This land comes at a cheaper cost, but zero improvements have been done to the lot, requiring you to permit and install necessary utilities or subdivide the lot on your own.
- Unimproved land: Some initial planning or permitting have been completed, but physical improvements like clearing, access, or utilities have not, adding cost and time to the project.
- Build-ready: This land typically is ready for immediate construction and is easiest to finance with banks. It already has basic improvements and permitting in place.
Location, location, location
Where the lot is located is paramount in the profitability and success of the development. But when it comes to buying the right lot, you will need to take location one step further. It's important to consider general location risks, such as:
- Environmental, like flood zones or likelihood of natural disasters.
- Growth and development in the area.
- Proximity to potentially negative features, like busy streets or commercial buildings.
- Positive features, like green spaces or walkability.
Buying land in an already desirable, developed area will be more expensive than buying on the outskirts of town or in an area that is slowly being developed. So the right location for the lot depends on the project at hand.
Zoning, ordinances, and HOAs or deed-restricted communities
Zoning is established by municipalities to guide and govern the uses of various areas. Certain areas may be zoned commercial, residential, or even historic. All these designations can impact your intended use and build design for the lot. If it's strictly commercial, for example, you wouldn't be able to build a single-family home. If it's residential, the number of structures may be limited or there may be minimum and maximum square footage restrictions in place. Do your due diligence beforehand, and do not assume you can get it rezoned (which can take years or may not even be possible at all).
Homeowners associations (HOAs) and deed-restricted communities can further restrict your use of the lot and design of your build. They can control everything from the type of roofing material you need to use to whether you can put a shed in your fenced backyard. HOAs can also come with some hefty mandatory fees, assessed to maintain roads and other amenities. If you're considering a lot in one of these communities, request a complete list of its laws before making an offer.
Property setbacks and easements
Setbacks are the minimum amount of space between your property lines and the house itself. They can have a huge impact on the buildability of the lot. If you want to build a three-bedroom, two-bathroom, 2,500-square-foot house but are looking at a small urban lot in the city, you may find the setbacks will not allow for the square footage you envision.
You may also have issues when looking at a rural lot. If the setbacks limit your location to a certain area, you may not be able to build for the best view or may be restricted to a certain area of the property that has exceptionally steep grades, for example.
An easement is someone's legal right to access and use a portion of the land for their own purposes. This can work two ways. You may have easements on the parcel you're looking at, which can limit what you can use that portion of the property for, or you may need an easement on someone else's property for things like road access or utilities. Either way, easements cause an extra layer of due diligence, paperwork, and expense.
Utilities and road access
Utilities are not a given on a piece of property. While more common in rural areas, it's quite possible for any property to have no power, water, or other utilities like cable run to it. If the lot isn't close to existing supply lines or you have a large property with intentions of building in the middle of several acres, for example, it can be extremely costly to bring utilities to the build site.
The same goes for roads and drives. You could be looking at a lot with no direct access to a public road. If an existing easement isn't in place, you will have to negotiate and pay for one using part of your neighbor's land. Depending on the lot and deal, this can be an absolute deal breaker.
The bottom line
Buying a lot and designing a custom build can be a wonderful opportunity as an investor. As with any property you are researching, regardless of whether it's a lot to build on or a rehab in the suburbs, it is also important to look up any liens and have a plan for financing and a solid understanding of the development process for the area before moving forward.
Keep in mind that financing on lots and for building is significantly more difficult to secure than a typical loan, but with the right lot and the right project, it can pay off.