Is Investing in Land Worth It if You Aren't Planning to Build a House?
When it comes to purchasing land that you don't plan to use immediately, it's essential to weigh the potential benefits against the associated costs and considerations. In this article, we explore the advantages and disadvantages of holding onto land, with a special focus on the financial implications and practical aspects of this type of investment.
Understanding the Risks and Rewards
Buying land, especially large parcels, can be an attractive investment. However, the moment you acquire ownership, the responsibility to pay property taxes begins. If you do not intend to build a house or develop the land in any way, the costs can mount up quickly. These property taxes can be outrageous and may not be justified by the minimal use you derive from the land.
My personal experience with 40 acres underscores these points. Initially, the plan was to hold the land until I could eventually build a house. However, life's unexpected detours, such as my children's issues and my own health problems, caused this plan to falter. Eventually, the land was sold, but not without significant property taxes, which were unfavorable given the lack of immediate benefit. In retrospect, I have plans to own land again, but this time it will be a smaller parcel, approximately 10-20 acres, with a house that I will actually live in.
A Family Legacy and Property Appreciation
My father's ambition was to leave a property to each of his five children. Over the decades, he managed to achieve this goal, with five distinct properties: the family home and a rural piece, and three lots in town that housed rental properties. He began his land purchases in 1948 and concluded in the mid-1980s, a period of roughly 36 years. Despite these extensive purchases, he likely paid less than $75,000 in total for all of them.
My father’s strategy was practical, as he purchased properties he genuinely enjoyed or ones that would not mind living in. He even remodeled the family home, which he intended to leave to the family, with cash over a period of 10 years. The three lots together provided rental homes, generating additional income. Unfortunately, his and my mother's move into assisted living care led to the liquidation of their assets over 8 years. My responsibility to sell the rural property to continue the care for my mother became necessary after her passing.
The end value of these properties was approximately 7 figures. While it would have been beneficial to wait another decade to benefit from the current real estate boom, the will and personal circumstances required that I sell the property. This illustrates the time factor in land investment and the impact of personal and estate considerations.
Pitfalls and Considerations
The financial implications of land ownership must be carefully considered. Unless the land is in a remote, uninhabitable location, most properties will appreciate over time, especially with a long-term investment horizon. Holding 40-50 years, as my father did, would likely yield substantial benefits. However, it's crucial to factor in property taxes and the need to replace the land with something of equal or greater value to avoid capital gains tax if you eventually decide to sell.
Moreover, if the land is part of an estate, it will pass to your heirs tax-free unless it is extraordinarily valuable. This offers a practical reason to hold land in such cases, as the tax burden is significantly lessened.
Conclusion
In summary, while land investment can be a financially sound decision, it's essential to consider the practical aspects and long-term implications. If you do not have significant debt and can afford it, buying land can be a viable investment, particularly for those who can capitalize on the potential appreciation over a long period. However, if you're not planning to build a house or develop the land, ensure that you understand the financial responsibilities and potential for tax savings.