Commercial Real Estate: When To Invest In Land

Commercial Real Estate: When To Invest In Land

Each commercial real estate investor has a “comfort zone” about loans.

The leverage seeker wants the largest loan that is practical. Others may have experience or training that calls for no loans at all. They must have the property free and clear.

Most of us have a loan comfort zone somewhere between these extremes. Nearly everyone accepts the idea of some sort of mortgage and the use of OPM (other people’s money) makes sense.

The degree of comfort that a commercial real estate investor has in taking on loans may affect the type of investment that they choose to make.

Many investors that prefer “free and clear” ownership prefer to purchase land as an investment. They want no improvements on it, just the bare land. Here’s some of the benefits of investing in unimproved land:

  1. There are no tenant problems with unoccupied land. Even in the case of agricultural land, where there may be a simple lease for farming or grazing, there is typically only limited contact between lessor and lessee. Often, the investment land lies unused.
  2. Well-chosen land investment can result in huge profits. We have all heard stories of owners who have purchased land for just a few dollars an acre, then later sold for millions (the key is “well-chosen”).
  3. Land is a secure investment. Even in the worst economic situations, the land will still be there. Value can fluctuate, but the investment will not disappear.
  4. Land represents wealth. It can be a quick source of cash for an owner to use for another investment. Land looks good on a financial statement. It adds permanence and stability to an applicant for loans or for a line of credit.

For many commercial real estate investors, land can deliver the investment value they are seeking without much of the risk that comes with other types of commercial real estate.