Land Investment: A Guide To Expanding Your Portfolio

Land is a finite resource, and as populations continue to grow, its value increases. This makes it a solid investment vehicle. However, buying raw land can be a risky investment as it may not generate any income and may not result in a capital gain when sold.

There are two main ways to add land to an investment portfolio: buying properties and collecting rent, or investing in stocks and funds that do the same. The former is a lower diversification approach but a more purist pursuit, while the latter is a broader diversification approach that is more correlated with the market.

For those who want to buy land directly, there are several things to consider. First, it is important to understand the practicality of owning land and running a land-based business venture. Second, investors should be aware of the specific types of land-related investment options, such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Finally, it is crucial to conduct due diligence on the legalities associated with the use of specific parcels of property, access to utilities, property taxes, and potential trespassing violations.

For those who prefer to invest in land indirectly through stocks and funds, real estate investment trusts (REITs) and real estate mutual funds are popular options. REITs are companies that invest in real estate by owning and operating properties, and they must pay out 90% of their gross income to investors as dividends. Real estate mutual funds primarily invest in REITs and real estate operating companies, providing diversified exposure to real estate with a relatively small amount of capital.

Raw land as a speculative investment

Raw land can be a risky investment, as it may not generate any income and may not appreciate in value over time. However, it can also be a lucrative opportunity for those with the right knowledge and strategy. Here are some key considerations for investing in raw land as a speculative investment:

Understanding Raw Land

Raw land, or vacant land, refers to undeveloped plots with no improvements such as buildings or crops. Investing in raw land is inexpensive and gaining popularity due to its low maintenance requirements. Raw land can be utilised for various purposes within zoning laws and regulations, such as leasing it for farming or hunting, or holding it for potential future development.

Benefits of Raw Land Investing

• Low cost of ownership and maintenance: Raw land is typically more affordable than developed properties and has minimal maintenance costs.
• Potential for quick returns: With the right strategy, raw land can provide expeditious returns through appreciation or leasing opportunities.
• Freedom to build or hold: Investors have the flexibility to develop the land or hold it for potential future gains.
• Potential for passive income: Raw land can generate passive income through leasing or farming opportunities.

Factors to Consider

• Due diligence: Conduct thorough research to understand the zoning restrictions, climate impact, location, tax expenses, access to utilities, and potential risks associated with the land.
• Long-term strategy: Raw land investment often requires patience and determination, as it may take time for the land to appreciate in value or for development opportunities to arise.
• Capital requirements: While raw land is generally more affordable, investors still need sufficient capital to purchase and potentially develop the land.
• Risk assessment: Raw land investment carries risks, including the possibility of depreciation, lack of income generation, and challenges in obtaining financing for development.

Investment Strategies

• Subdivide and resale: Investors can increase the overall value of their land by subdividing it into smaller parcels and selling them separately.
• Buy and hold: This strategy involves purchasing raw land and holding it for the long term, expecting appreciation over time due to factors such as population growth or increasing demand.
• Leasing: Leasing the land for short or long-term uses, such as farming, hunting, or utility companies, can generate consistent cash flow without the risks associated with development.

Investing in raw land as a speculative investment requires careful consideration of various factors. It can be a lucrative opportunity for those with the right knowledge and strategy, but it also carries risks that should not be overlooked. Conducting thorough due diligence, understanding the local market, and seeking expert guidance can help investors make informed decisions about raw land investments.

Residential and commercial land

For small investors, real estate investment trust (REIT) exchange-traded funds (ETFs) are a good choice. They are inexpensive and can be purchased or sold in real-time. They are also diversified by property type and geography. For example, the Vanguard REIT ETF (VNQ) provides diversified exposure to industrial, office, retail, healthcare, public storage, and residential property developments.

However, REITs negate the ability of the landowner to enjoy using the land. Therefore, they are not a feasible option for people who want to experience the feeling of land ownership.

Before investing in residential or commercial land, it is important to conduct due diligence. Investors should consider the land's access to basic utilities, its annual property tax obligation, the potential for trespassing violations, and its remoteness from the landowner and the nearest community.

Additionally, investors should be aware of the legalities associated with land use. For example, land-use restrictions may limit how the land can be used, and land easements may grant access to a portion of the property to an unrelated party.

Overall, while residential and commercial land investments offer benefits such as flexibility and diversification, it is important to carefully consider the constraints and conduct thorough research before adding them to an investment portfolio.

Row crop land and livestock-raising land

Row crops are also a safe investment as they provide steady yields and long-term land appreciation. They are also less susceptible to the risks of poor weather, natural disasters, or crop disease that can impact the value of the crop. However, investors can expect to make less money from row crops than from specialty crops.

Livestock-raising land is another important category of land investment. Livestock plays a major role in sustainable food systems and is a contributor to poverty reduction, food security, and agricultural development. According to the FAO, livestock contributes 40% of the global value of agricultural output and supports the livelihoods and food and nutrition security of almost 1.3 billion people.

Livestock is also an important asset for vulnerable communities. Globally, around 500 million pastoralists rely on livestock herding for food, income, and as a store of wealth. Additionally, livestock production systems have the potential to contribute to the preservation of biodiversity and carbon sequestration in soils and biomass.

Therefore, investing in row crop land and livestock-raising land can be a wise decision for those looking to add land to their investment portfolio.

Mineral production land

Mineral rights owners do not take on any drilling liability and do not pay any expenses. There are also no environmental risks associated with mineral rights ownership. Mineral rights owners can choose to drill oil and gas wells or excavate hard rock materials like gold.

There are different types of mineral rights, including non-producing mineral rights and producing mineral rights. Producing minerals have one or more active oil and natural gas reserves, while non-producing minerals are undeveloped oil, gas, and other natural resources. Here are some of the main types of mineral interests and rights:

• Mineral Interest (MI): The most common agreement as it is straightforward. The property owner automatically owns the mineral rights, and if drilling is to be done, permission and payment must be given to the landowner.
• Royalty Interest (RI): The owner can make money without any upfront expenses. If the owner leases the rights to an oil and gas company, they get royalty payments.
• Overriding Royalty Interest (ORRI): The owner only receives royalties while production is ongoing on the land. Once production stops, the lease expires, and the owner is not entitled to any money.
• Working Interest (WI): The owner has the right to explore the land but has to pay expenses. It can be profitable if the rights are leased to an oil company as they will cover all expenses.
• Non-Operated Working Interest: This occurs when the rights are passed down through family members. The owner does not operate the mining machines but can still earn money.
• Net Profits Interest: A type of mineral right that is not common. The owner only makes money when there is a profit associated with the land.

There are several ways to invest in mineral rights:

• Buy the mineral rights from the owner.
• Form a partnership with other investors to share the costs.
• Buy the "rights" to become eligible for a percentage of proceeds from the extraction.
• Invest through exchange-traded funds (ETFs) that deal with mining companies.
• Invest through mutual funds.
• Invest through real estate investment trusts (REITs) if the mineral rights relate to real estate.
• Make direct investments with companies that own natural resources through private equity.
• Direct investment in a mining company.
• Invest in equipment used to produce and extract minerals.

Before investing in mineral rights, it is important to research potential opportunities, evaluate the quality of the mineral assets, determine your investment strategy, and contact a mineral rights broker or attorney. It is also crucial to understand the legal considerations and the production process and evaluate the operator if you plan to collaborate with a mining company.

Real estate investment trusts (REITs)

There are two main types of REITs: Equity and Mortgage. Equity REITs own or operate income-producing real estate, while Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities.

REITs are a good investment option because they offer high dividend yields, liquidity, and diversification benefits. They are also a way for individual investors to earn a share of the income produced through commercial real estate ownership without having to buy commercial real estate themselves. Additionally, REITs are not typically taxed at the entity level, which allows investors to avoid double taxation on dividends.

However, there are some risks associated with investing in REITs. These include interest rate risk, occupancy rate risk, geographic risk, and business risk. It is important to consider these risks before investing.

Overall, REITs are a great option for investors looking to add land to their portfolio, as they provide access to income-producing real estate assets without the need for direct ownership.

Frequently asked questions