Determine How Much Land You Can Afford

Determining Affordability

One of the pillars of our mission statement is affordability. We are here to help you make your dream of becoming a landowner a reality by offering amazing properties for sale at an affordable price. Determining what you can afford is one of the most important components of buying vacant land (or anything for that matter), and you might be surprised to find the options available and just how affordable purchasing vacant land can be. When you find that perfect property, you have a couple options to complete the purchase. You could pay cash if you have the funds available or you could finance the purchase by utilizing whatever financing options are available to you. You may have strong feelings one way or another, but it is important to review all the pros and cons and decide on what is best for you. Let’s take a look at some of the advantages and disadvantages of both, and how they impact affordability.

Purchase with Cash – Pay in Full

Advantages – When you purchase a property outright, the deed is transferred into your name at the time of the sale and there is no deed of trust, mortgage, land contract or contract for deed associated with the sale. When you don’t have a mortgage or loan, you don’t have to pay any interest, which can save you a significant amount of money in the long run. Additionally, if you have the ability to pay cash, you might be able to negotiate a discount. At Land Elevated, we offer our buyers a Pay In Full Discount if they are able to pay cash, sometimes upwards as much as 10% of the original list price.

Disadvantages – Not everyone has thousands of dollars saved up to purchase vacant land, but if you do, chances are that you had to save that money over an extended period of time. During that time, you are not a landowner and might miss out on a great opportunity because you don’t have enough saved to make the purchase. Additionally, you are not able to take advantage of the concept of leverage – any cash used to purchase the property cannot be used to develop the property or make any improvements. This further delays your timeline to develop the property while you start saving again. Another disadvantage is that your affordability is limited based on the cash you have available. A property that might serve you better or make a better investment may be just out of your budget forcing you to hold off on the purchase even longer, or worse, purchase a property that really isn’t the property you want.

If you don’t have the money saved up, or if you have decided you would rather keep that money to invest in improvements or develop the property, financing could be a good option.

Purchase with Financing – Terms

Advantages – First and foremost, this makes land ownership affordable! Instead of needing thousands and thousands of dollars to purchase a property, all you need is a down payment which can be as low as $49 (not a typo)!  Another advantage is this provides flexibility and leverage to use your money for improvements, developing the property, or making other investments that could generate a higher return than the interest you are being charged. Lastly, financing a property can expand your search criteria and open up the pool of potential properties allowing you to be more selective with your search and ensure the property you purchase is exactly what you want.

Disadvantages – Anytime you finance something, there is almost always interest charged. Real Estate loans are typically fully amortizing loans, meaning you pay principal and interest with each monthly payment. At the beginning of the loan, the majority of your monthly payment is applied towards the interest charged, but over time as you pay down the principal, the interest charged is less and less. Depending on the term (length of the loan), you could end up paying a significant amount in interest. Another disadvantage is that depending on how the purchase is structured, you might have a lien recorded against the deed. This doesn’t really have much of a negative impact and is very common, but if you don’t make your payments on time, you could risk losing the property to forfeiture or foreclosure. Lastly, if you are financing the property, your ability to negotiate might be limited.

How to Run the Numbers

There are different philosophies when determining if it is best to pay cash or utilize financing, but it all depends on your personal situation. When paying cash, your holding costs are going to be minimal, and you don’t have a recurring monthly payment but will have lost some ability to leverage your investment. This is summarized as the Time Value of Money concept which is defined by Investopedia as “the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. Time Value of Money is also sometimes referred to as present discounted value.”   Here’s a link to the definition with a great video on how to understand the concept in more detail ( we will also talk about this later in more detail). There are several calculators to help run the numbers, but here is a link to calculatorsoup.com which has a number of different calculators depending on what you are trying to analyze.

Note that it can be challenging to obtain financing for single one-off improvements, like installing a septic system, or a well, so keep that in mind when making your decision. Make sure to have enough reserves to cover those expenses if planning to do them one at a time.

If you do decide to finance the property, it’s important to understand the numbers and different types of loans out there. There are secured loans, unsecured loans, interest only loans, fully amortizing loans, negative amortizing loans, balloon payments, fixed rate loans, variable rate loans, and some other unconventional loans. We discuss this in more detail in Chapter 8, but we quickly want to show you how to run the numbers on one of the most common types of loan, a fully amortizing loan. A fully amortized loan means that the borrower is paying both principal and interest with each payment and the loan is fully paid off by the end of its term. There are a number of mortgage calculators out there, but we use Zimple Money for ours. Just plug in the numbers and it will show you an amortization schedule which shows just how much of each payment is applied to principal and interest. Here’s an example of a $10,000 loan at 7.5% interest rate with a 2-year term.

Note that over the 2-year term, you will have paid $799.90 in interest. While that is an additional expense, it makes the purchase much more affordable if you don’t have the $10,000 to spend.

Staying Within Your Budget

The last thing we will comment on in this chapter is to make sure that you stay within your budget. There are a number of tools out there to help track your finances and determine what discretionary income is available after all your other monthly expenses. If you decide to finance the purchase, make sure to stay within your means and make all monthly payments so you don’t lose the property.

Conclusion

We hope this was valuable in helping you understand how to calculate what you can afford and how to run the numbers in an analysis to determine if you should purchase with cash or financing. There are pros and cons to both purchasing with cash or financing, and each situation is going to be unique. Make sure you do your homework and if you have any questions, we are always here to help.