You may have heard of many famous people around the country buying up plots of land or farmland. You’ll also hear people say that land is one of the few things that nobody’s making more of. As such, many view land as a safe and potentially very lucrative investment, citing the possibility for land appreciation and potential tax benefits. However, most physicians can not afford to go out and buy land in the quantities that billionaires can. Therefore, before going out and buying a parcel of land, physicians should have a clear understanding about the advantages and disadvantages of land ownership, what potential returns are, and how it fits into their overall financial plan and investment portfolio. There are various different ways to invest in land, each with their own pros and cons. Below, we’ll cover these topics and more.
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Should Physicians Buy Raw Land, and Is It a Better Investment Than Other Alternative Investments?
One question we see often on our physician communities is from a physician who passes by a raw parcel of land or hears about somebody selling land in a hot area and wonders if it makes sense to ‘just buy it’ under the assumption that it’ll either appreciate or somebody will want to buy it from them to do something bigger with it.
While there are success stories for every scenario, when we hear this, we get nervous, because owning land without any plan with what to do with it is rarely a winning proposition. Remember that all money that is sunk into the purchase of the land has an opportunity cost. That money could potentially be earning double digit returns annually in a diversified investment portfolio or in a real estate fund, or currently, even a half way decent return in a short term investment such as a high yield savings account.
Also, there are costs associated with holding the land. So while you hold the land, you will likely be paying upfront costs related to the transaction, property taxes, maintenance, and potentially other costs.
To make this tangible, let’s say you buy a piece of land for 1 million and then sell it 5 years later for $1.5 million. Sounds like a great return right? But remember that 1 million invested in the market or other investment that yields 8.5% over that time will give you the same return, without the costs, hassles, or risks associated with land ownership that we discuss below.
This isn’t to discourage you from buying the land - but more to say that you should have a plan for what to do with that land while it sits waiting to appreciate or for that magic buyer, so that it doesn’t turn your asset into a liability. Land actually can be a great investment and a great way to diversify your investment portfolio, but you have to know it's advantages, disadvantages, and how to vet a potential land investment.
What Are the Advantages to Investing in Land?
1. Diversification of your investment portfolio and of income streams / cashflow - and potentially even passive income
We’ll start with the obvious - on Physician Side Gigs, we’re big fans of diversification. Investing in a different asset class opens up new possibilities for tax deductions, income streams, and other opportunities, and hedges against other assets that can result in sudden losses, like the stock market. Land values and income streams are not generally tightly correlated with the swings of the stock market, so you could continue to produce revenue even during a market downturn.
2. It’s a limited asset and therefore will generally not lose value over time unless you overpay for it or you are forced to sell at an inopportune time
Given the scarcity of land and the inability to make more of it, depending on your market, you may have experienced first hand that it can be hard to find large plots of land for ownership. Those that own them, particularly in a ‘path of progress’ such as a city that’s growing or has a major new employer coming in or an area where a new highway is being built, will generally see the value of their investment go up over time as it becomes harder for others to build or find space in the area, necessitating buying from an existing owner at whatever price the market will allow. Of course, there is always volatility in land prices, so if you have to sell at an inopportune time or if you pay too much when you acquire the land, you could still lose money, as with any investment.
3. It’s a hard, tangible asset
Many of our physicians like real estate investing for this reason. Unlike cryptocurrency, angel investing or venture capital, or even stocks and bonds, the likelihood of the value of land going to zero is very low. Because it is a hard asset that you can touch, there is security in owning it and knowing it will always hold some value.
4. Versatility
As you’ll see below, there’s so many potential ways to invest in land or to adapt to changing markets and demands with your asset. As long as you can get the county to sign off on whatever zoning regulations apply, you can do so many things with the asset depending on demand for particular uses, and you have multiple different types of buyers that you can tap when it’s time to divest of the asset.
5. Estate planning or generational wealth creation
This is an asset that can be passed down to future generations. If it’s income producing, it can be a great (potentially significantly tax-advantaged) income stream, which is an amazing gift to pass on.
What Are the Downsides to Investing in Land?
1. Land can be a liability, and requires maintenance and oversight, some of which can be costly
When you own land, much like your home, it is something that you are responsible for. Anything that happens on your land is your responsibility. If one of your trees falls onto another property, if there’s local regulations about the grass height, or if people start using your land for something they’re not allowed to use it for, it will be your hassle to deal with. It’s not like an index fund or a real estate fund where though you technically own a piece of a company, you can set it and forget about it.
Additionally, there are generally fixed costs to land ownership, such as property taxes. Depending on what you’re doing with it, you will also have to pay varying maintenance costs. If you want to develop out the land there will likely be development costs related to permitting and building out the infrastructure necessary to bring your product to fruition. You may have to pay someone or multiple someones to maintain the property or look out for it. If there are natural resources in the property there may be costs associated with regulations or taxes. You may need insurance policies. All of these things will cut into your profits and should be thought about with a cash on cash calculator similar to that used in determining whether a rental property is profitable.
2. Land is not a liquid asset, so you can’t easily pull your money out of it
Similar to many other types of real estate investments aside from publicly traded REITs, you can’t just get your money out on a moment’s notice because you need access to it. Once you purchase land, you’re typically going to have to hold on to it for a while unless you’re willing to take a significant loss to sell in a rushed situation. The buyer who’s going to give you the best offer is likely going to have a lot of checkboxes they want checked off by your particular piece of land, including location, what it is zoned for use for, what competitors are in the area, and what they want to do with the land and how amenable your particular plot is.
3. Unpredictability of factors beyond your control
Unlike some real estate investments or business investments, land ownership and investing has its fair share of things beyond your control as an investor. So much of what makes your land valuable is what’s happening around it and what you’re allowed to do on your land. Zoning and regulations can change, city plans for roads can change, employers in the area can change, and more, all of which will affect the market value of your land or your ability to use the land in the way that you want. If you buy a plot of land assuming you can use it for commercial purposes or to put up a high rise and the city determines this is not allowed, you may be out of luck, so you’re going to want to do your due diligence beforehand to ensure that existing rules, precedent are as favorable as possible for your intended use.
4. Land can tie up assets and not always cashflow, especially at first
Until the land starts generating income in some way, you may be paying for the land without any tangible ROI. Because these investments generally require more money down (banks generally have a harder time funding purchases where they can’t easily reclaim their money), this may mean that you have a significant amount of money down that isn’t generating revenue. It will likely take some time to recoup your investment. Depending on what you’re investing in within land investments, there’s a good chance that it may also not cashflow as much as some commercial real estate investments, and your cash on cash returns may be less than what you may be accustomed to hearing about for some of those.
What Are the Different Ways Physicians Can Invest in Land?
So, what are the things you can do with land if you decide to go down this route?
One of the most common ways that we see physicians investing in land is actually through other real estate investments, whether they’re buying land for residential or commercial real estate offerings, or to build medical office buildings. However, there are many other ways to use land as an investment, including as farmland or to raise livestock, as vineyards, as event space, or even for oil and mineral purposes. Each of these carries its own pros and cons, risks and benefits, and tax considerations, so it’s important to know what your goals are when picking between these. We’ll go deeper into the details in the section with subcategories below.
1. Residential and commercial real estate
You can buy land and then build on it (or buy existing properties and rent them or renovate/repurpose them). You can do this on a small scale with individual units or with commercial real estate such as self-storage, office buildings, multifamily apartment buildings, mixed using shopping developments, hotels, or anything else you can think of! We talk about this method of investing in real estate quite often, and you can see more our dedicated pages on investing in real estate as a physician. Some examples include:
2. Farmland bought for farming or raising livestock
There are several ways to invest in farmland, including both buying and actively living on the land, as well as by being an investor on a project more passively. If you choose do this more actively, you can live on the land and enjoy both the space and the tax benefits, while also owning an income producing asset. If you are going to do this yourself, you have to be interested in this lifestyle and understand the business and the actual operations. It’s one thing to have some animals that produce eggs and milk and row crops that produce veggies that your family consumes, and another to actually have a scalable farming or livestock business.
Another thing many physicians who live in areas with a lot of farming can do is rent out their land to farmers or other commercial businesses. This can be an attractive arrangement that takes you out of the physical labor but results in cashflow. The nice thing about these tenants is that they tend to pay upfront a few times a year, relieving you of some of the hassles of being a landlord that you may encounter in other scenarios.
3. Land that is intended to be used for timber or mineral rights
These can be interesting investments, as they can result in substantial income streams that could be relatively passive. You can make decisions about when to sell timber or when to use your rights based on when it is opportune for you and the value of the product (the values can fluctuate). Income from timber can be treated as passive income. Mineral rights can include oil and gas partnerships, which have their own tax benefits. Be careful when you purchase the land that the mineral rights convey with the purchase, as if someone else holds those rights, it can lead to a messy legal situation or the ability for that person to make money off of your land. Similarly you want to make sure there are no easements on the property that allow others access to the land.
4. Event space or recreational use space
There are many uses to open areas that can be businesses in and of themselves. Many wedding or retreat venues use open plots of land. There can also be activities such as horseback riding or petting zoos. Your land can also be used for hunting, fishing, and camping (just make sure you follow applicable local rules and are aware of permitting).
5. Vineyards or orchards that are mixed businesses and farming
These options allow you to combine the income from the fruits of your labor with a potential other business model of allowing others to come experience the farmland, having a restaurant or wine bar, having a brand of products, or even having the opportunity to enjoy other experiences on the land.
6. Additional revenue streams from leasing space
There are lots of ways to lease your land to others if you’re not interested in running a business yourself. As mentioned above, you could lease to timber companies or farmers and recreational space, but you could also use your land to be used for billboards, to have parking lots on, for retail space for things like farmer’s markets or otherwise. You can use it for renewable energy such as using it for a solar farm, wind turbines, and geothermal power. Depending on what you use it for, you’re going to again want to be very aware of compliance with the state and local regulations, zoning laws, and environmental regulations. Making sure you have a lawyer review these as well as any leases will be important to mitigating risk and liability.
What Are Alternative Ways to Invest in Land Without Being the One That Is Physically Responsible for It?
Just like with other REITs, there are REITs available for investing in land. There are several crowdfunding investment sites that allow you to invest in farmland, and several public real estate investment trusts (REITs), exchange traded funds (ETFs), and exchange traded notes (ETNs) that also allow you to invest in land and land investments more passively. There are many funds that specifically tailor to a specific crop, type of resource, or mineral. If you’re thinking about doing a private fund, make sure you understand the liabilities you may take on and do careful due diligence on the operators and their compliance with regulations. Some of these may promise tax benefits that you want to make sure are above the line and legal.
What Factors Should You Consider When Determining Whether Investing in a Piece of Land Is Going to Be Profitable?
Like any real estate investment, you’re going to want to compare income versus expenses to determine your returns, as well as look at the risk profile. The first thing you’ll do is calculate the potential income factoring in what is bringing in the revenue - as above, this could be income related to farming, livestock, storage, mineral rights, timber, rental or event space, or otherwise.
Then you’ll want to look at the liabilities and expenses of the land. Consider the permitting situation and whether you can currently do the things you want to do on the land, what potential legislation or local rules and regulations have been proposed or may be proposed, and what the history of the area has been in allowing people to do what you do. You also want to know if there are any liens or other records on the property that might determine what you can do with the property or any responsibilities or liabilities you may have. As stated above, it’s very important to know if you have all the mineral rights on the land, if there are any easements on the property that allow others access to it, and other rights about what access you have to waterways, if there’s any limitations on the land deed about what you can and cannot do on the land (these are usually publicly available on the internet but if not you can go to the county clerk’s office to check them).
You’ll want to know about what taxes and maintenance will be necessary. Pay particular attention to the access to water, utilities like electricity or other telecommunications, plumbing, and more. Know what kinds of issues have come up on your land in the past, if there tends to be trespassers on the land, or if locals use your land unofficially for other reasons. All of this requires good due diligence to forecast potential future issues.
Then you get into the nitty gritty, which unless you’re a farmer or developer or have some sort of experience in this area, you may need help with. For example, if your intention is to use it as farmland, you’re going to want to know things about the quality of the soil, the topography of the land, access to water, and any other repairs, restorations, or improvements you’ll need to use the land for your desired use. If your intention is to use it as an event space, do some market research to learn how likely it is that it’ll get rented and how much you can charge, as well as what the competition is. This is where consulting with relevant expertise becomes really important, because as we stated previously, land is illiquid and it may take you some time to get a buyer, and you don’t want to be holding onto a non-income producing asset for too long.
Conclusion
Investing in land can be a very interesting way to diversify your income streams. It’s important to know what it will take to make that investment profitable and base your decision on numbers rather than pure speculation. Additionally, many of the things you may choose to do with the land will require learning a lot about state and local regulations and other legalities, as well as potentially having to learn about other industries. Always consult with appropriate licensed expertise such as lawyers before going down these pathways, especially as not all of the issues you may encounter are intuitive, and there are many nuances to rights and ownership and compliance associated with these investments.
Additional Real Estate Investment Resources for Physicians
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