By Mike Migone, CCIM | December 23, 2014
It is safe to say that 2014 has been a great year for commercial real estate. Across the board, vacancy rates are down and rental rates are up. With all the buzz about the performance of office, multi-family, industrial, and retail, it is easy for some investors to overlook the opportunity presented by what could be commercial real estate’s pocket aces – land.
Let’s face it, land probably is not the first thing that comes to mind when it comes to high yielding commercial real estate investments, however, there are some forward-thinking and perhaps a bit adventurous investors who believe the potential payoff for landowners is huge.
1. “Buy land, they’re not making it anymore.” – Mark Twain Land can be an extremely valuable resource as it is a finite asset with limited quantities available, so while there may be fluctuations in the short-term, in a healthy economy, such as is the case now, the value will only continue to rise. It is the simple rule of supply and demand. As of the third quarter of 2014, Sarasota for example has upwards of $352 million dollars in development, new projects under construction, or in permitting. Developers are ready to build and therefore project-ready space is quite a precious commodity. Those investors who can see the opportunity at hand, with the recovery in full swing, development in full force, and growth all around them, may see an incredible payoff in the near future.
Land is presently undervalued and it took the greatest hit during the downturn. Now, as development continues to ramp up, land is expected to return to peak boom pricing and especially in areas projected to grow. Since land took such a great hit during the recession, falling significantly below historic market value in some areas, those investors who take advantage of the opportunity to capitalize on this recovering, but currently undervalued asset class stand to see the greatest gains when the inevitable happens and land values return. With the help of an experienced advisor, investing in the right piece of land now could create the greatest opportunity for investors to cash in on future recovery.
2. Land is a turn-key investment. Unlike some other commercial real estate investments, the right piece of land does not require landowners to perform any maintenance in order to sell for a substantial return. The key to turning it into a great investment is making sure to buy the right parcel at the right price.
3. Land is low-maintenance. Aside from paying taxes, land is a much lower maintenance commercial investment. Owning land does not involve some of the headaches that come from tenanted properties such as maintenance emergencies, defaulting tenants, and building upkeep costs. In many cases, investors may buy and sell a piece of land for a profit without ever even having to visit the property.
4. Land can be easier to acquire at a great price. Some vacant landowners are motivated to sell and sometimes for far less than what they paid. A large percentage of vacant land owners do not live near the property, many of them have never even seen it. Therefore, in many instances there is no emotional attachment to the property. Because most land does not produce income, many owners who are unfamiliar with how to capitalize on their investment are willing to let it go.
5. Land can be used to create passive income. One of the biggest misconceptions about owning land is that it is not an income-producing asset. However, landowners can create passive income in certain instances through leasing the land or providing seller financing. Banks have historically been slow to finance vacant land because they do not view it as an income-producing asset. Therefore, some investors have been able to take advantage of this by offering seller financing. With a shortage of bank financing, sellers can personally finance the land and charge above market rates to do so, creating a stable passive income stream. The bonus in this scenario is that some of the smaller investors most inclined to seek out seller financing often fail to make payments over time and ultimately forfeit the piece of land as well as their initial investment and installment monies, creating pure profit for owner-financers as well as the the opportunity to resell the land. An alternative approach involves arbitrage wherein the purchaser obtains an undervalued parcel of land in one market, then turns around and sells it for a profit in a different market.
Those investors who are looking for a commercial investment that is low-maintenance, relatively easy to acquire, and one that possesses fantastic potential for cash flow as well as a profit, would be wise to follow Mr. Twain’s advice and take a serious look at land. As with any investment, the best way to ensure that you find one suitable for your specific investment goals is to work with a knowledgeable and experienced advisor specializing in this area.
Mike Migone, CCIM serves as a Senior Investment Advisor for SVN (SVN) Commercial Advisory Group specializing in the sale and leasing of office, multi-family, industrial, land, and retail properties in Sarasota, Manatee and Charlotte counties. With over 25 years of commercial and residential real estate experience, Migone has a career sales volume in excess of $100 million and remains a top producer. Migone possesses extensive experience in the industry including handling the lease and sale of retail, office, land, and warehouse products. Migone represents buyers and sellers of income-producing assets, office, industrial, and land and specializes in applying value to commercial real estate using cash flow principals.