Land ownership can be complex and confusing. Most people don’t really understand the nuances of land investments – the due diligence required, estimating development costs, or navigating the entitlement process.
Because land is so intricate, landowners are often the forgotten class of real estate investors. There simply isn’t much high-quality information available to guide them through the maze of decisions regarding land values, ownership structures, and exit strategies.
While there’s tons of content on real estate investing strategies like fix-and-flips, buy-and-holds, and real estate syndication, reliable guidance on land investing is scarce. Landowners have many unanswered questions and untapped opportunities sitting on their properties.
If you’re a landowner looking to maximize the value of your land, this guide shares insider tips to increase your property value, determine the optimal time to sell, and exit your investment efficiently. Over the years, I have diligently diversified my investment portfolio, venturing into more than 40 assets across a range of classes. From multifamily properties to land development, car wash facilities to built-to-rent properties, and even mixed-use projects, I have explored various markets and regions, ensuring a well-rounded approach to risk management. This wealth of experience is why, in this article, I will share invaluable insights about land development.
How to Value Land
The most common way to estimate land value is the comparable sales or “comp” approach. You look at recent sales prices of similar parcels in the area and extrapolate a price per acre. Then you apply that rate to your property to get a ballpark market value. This method provides a quick baseline number to start with.
However, no two land parcels are exactly alike. To truly understand your specific property’s worth requires assessing it from the perspective of a potential developer or commercial buyer.
Real estate developers prioritize profit potential above all else when evaluating land acquisitions. If a project doesn’t pencil out financially on paper, banks won’t fund it. Therefore, the underlying value of land directly correlates to the future income potential that can be generated from the site. Makes sense, right? But what does this actually mean in practical terms?
Every property has a distinct topography, proximity to utilities, offsite infrastructure needs, environmental considerations like wetlands or flood zones, and zoning/permitting requirements. Until extensive due diligence is conducted on a site, its development potential and value is largely theoretical. There are a lot of unknowns.
By grasping how real estate developers assess feasibility, determine highest and best use, and project future cash flows, you can better understand your own land’s true economic value and what a commercial buyer or builder would likely pay for it.
Determining the Optimal Time to Sell
Deciding when to sell depends on market forces and personal goals:
|An Examination of Influential Market Forces|
|Cultural shifts||Preferences change on how people live and work, impacting land values. For example, the pandemic accelerated migration to lower density suburban areas as remote work became widespread. Landowners in these high-growth areas saw land values increase.|
|Development growth||"Rural" land becomes more valuable as development expands outward from city centers. Predicting where future growth will occur can lead to major profits for landowners.|
|Real estate cycles||Values fluctuate in predictable boom and bust cycles of 5-7 years on average. Understanding the current cycle position allows landowners to time sales for maximum value.|
|An Exploration of Personal Financial Goals|
|Estate planning||Passing down cash instead of illiquid land may be preferential for inheritors. Selling allows easy division of proceeds.|
|Tax planning||Strategies like 1031 exchanges allow deferral or reduction of capital gains taxes from selling land. This may motivate sales timing.|
|Cash flow||Liquidating land assets when cash is needed for other investments, expenses, or life events.|
There’s no perfect time to sell. But consider both market and personal factors when deciding on timing. Be strategic based on where the market is headed and your own motivations.
Strategies for Maximizing Property Value
While macro market forces largely dictate the value of land, there are also strategies landowners can employ to maximize sales prices when they do decide to sell. Here are three tips:
1. Identify the Likely Buyer – Research the property’s current zoning and plausible highest and best uses. This allows you to target suitable developers, commercial tenants, or home builders in your marketing process.
2. Explore Multiple Exit Strategies – Selling “as-is” provides quick liquidity but other options like partial sales, joint ventures, and seller financing may enable you to extract even higher residual value.
3. Utilize the Entitlement Process – Investing time and money to obtain approvals and permits significantly increases potential value but also involves risk. Carefully weigh the trade-offs for your situation.
Creative Land Investment Exit Strategies
As a landowner, you have several options to monetize your investment beyond just an outright sale to a single buyer. Some creative strategies include:
Sell “As-Is” – The quickest and simplest exit but the buyer assumes all risk and responsibility for due diligence.
Provide Due Diligence – Supplying preliminary feasibility studies, surveys, environmental assessments and other prep work upfront may increase your final sales price.
Joint Venture – Partnering with an experienced developer provides upside from a successful development project without taking on all the risks yourself.
Plat and Sell Entitled Lots – Investing time and money into the entitlement process to create legal building lots significantly boosts underlying land value. You can then sell platted parcels to home builders.
Structure Land Leases – Farmers may pay you an income stream to lease vacant land for crops. Developers may also lease high-potential commercial sites rather than buy outright.
Develop the Land Yourself – Highest risk and upfront capital needed, but retains all the profit upside if you have the expertise to successfully subdivide and develop a project.
Choosing the optimal exit strategy depends on your personal timeline, risk tolerance, and ultimate goals. But the key is understanding you have options. Explore which one aligns best with your needs.
Tax Reduction Strategies
Like other real estate investments, landowners face capital gains taxes when selling a property for more than its purchase price. However, creative strategies can help reduce or defer tax burdens:
Installment Sales/Seller Financing – Carrying back financing to the buyer allows you to spread capital gains over time rather than paying everything at once.
1031 Exchanges – Careful use of this tax provision allows deferring capital gains by reinvesting proceeds from one property into another.
Opportunity Zone Investments – Investing gains in qualified opportunity zone projects allows you to defer taxes until selling those assets.
Joint Venture Partnerships – Properly structuring a joint venture or equity partnership may allow deferring taxes on gains until you eventually exit the partnership.
Cost Segregation Studies – Allocating purchase price correctly between land and improvements allows maximizing depreciation deductions on buildings and other improvements.
As you explore options, consult experienced legal and tax professionals to ensure you employ these complex strategies effectively.
Owning vacant land or development sites presents unique challenges compared to other real estate investments. By understanding drivers of land valuation, timing sales strategically, maximizing value, weighing creative exit strategies, and mitigating taxes, landowners can optimize their profit potential.
Every landowner’s situation is unique. Engage an expert advisor to assess your specific goals and property characteristics. An objective consultant can provide guidance on maximizing the value of your land assets.
With the right specialized knowledge and strategic approach, land can transform from an idle or underutilized holding into a key driver of wealth-building and cash flow in your broader real estate portfolio.
Are you interested in learning more about multifamily real estate investing? Our team of experienced professionals is here to help. Whether you’re looking for advice on conducting market research or need assistance in identifying the best investment opportunities, we have the knowledge and expertise to guide you through the process. Connect with us today through our Telegram channel for real-time updates and valuable insights. Subscribe to our YouTube channel to access informative videos and expert discussions on multifamily real estate investing. Follow us on Instagram for inspiring visuals and exclusive content. Check out our new customized ChatGPTs: Real Estate Investing Coach and Real Estate Guru. Contact us now to schedule a consultation and take the first step towards achieving your financial goals in the multifamily real estate industry.