Speculating on land has been a tried-and-tested real estate investing strategy for centuries. As the old saying goes, you should buy land because they aren’t making any more of it. So exactly what is land speculation?
This type of investment strategy is characterized by buying vacant land and holding it until development interest increases in an area. Typically, land speculators will buy up undeveloped property hoping bigger commercial builders and employers will enter the area in the future.
Here's an overview of this type of real estate speculation, the pros and cons of this type of investment strategy, and whether real estate investors should try to get in on the action.
What is land speculation?
Land speculation typically involves the purchase of undeveloped land to hold for an indefinite amount of time. The thinking behind land speculation is that a future economic event will dramatically increase the value of the land, which can then be sold.
This economic event is usually urban expansion, housing development, or major employers or industries moving into a particular area. The idea is that there has to be a substantial prospect of future economic growth, and that you, the speculator, will benefit from other real estate developers moving into the area.
Why is land speculation an attractive investment?
There are multiple benefits to land speculation. If you choose the right regions and land, the returns on rural or urban land speculation make it an attractive investment. Here are some other benefits and factors for investors to consider.
Lower purchase cost
Because land speculation is a future bet on a particular plot of land, the cost to entry is usually minimal. Unproductive and vacant land is generally the cheapest type of real estate that can be purchased.
Lower holding cost
Generally, land in this category of investment class is not generating any services or income. Given this, holding costs such as property tax and insurance are low.
Typically, land speculators won’t simply buy one property and sit on it. They’ll diversify their holdings in many different areas to optimize for potential future returns. In this sense, investors can hold land in multiple different areas, betting that future economic development will boost land values and provide good financial returns.
Because you're purchasing vacant land that's not serviced, you're usually paying very little for the property. That said, once expansion creeps in and services, businesses, and residents start to move closer, land values will improve dramatically. Therefore, with land speculation, you can make significant multiples on your initial investment if you choose the right location.
Land ownership in a rural farming area can give the land speculator an interesting income stream while they wait for future economic development. The speculator can charge land rent for the farmland, which will be used for agricultural purposes by the renter.
You may be able to harvest the trees through logging on vacant land with woodlands. This can generate an income stream while you sit on the land.