How to Grow and Diversify Your Investment Portfolio With Undeveloped Real Estate
Diversification. It’s the word that you’ll hear in every investment how-to out there, especially those aimed at new investors. The rule of thumb is to mix your portfolio up with domestic and international stocks, bonds, and short-term investments representing various industries. And for a buy-and-hold mentality, which is the best practice for retirement accounts, this may be enough for some people.
But if you were hoping to retire in the last three years, you may have had a nasty surprise when the pandemic hit and markets took a dive. And now, in mid-2022, interest rates are climbing and the markets are suffering again. Luckily, with the right kind of investments, you can better insulate yourself from unforeseen market downturns like the one we’re experiencing. And one key way to diversify your investment portfolio is with undeveloped real estate.
Why Undeveloped Real Estate Can Be a Good Investment
Like any other investment, there’s always going to be some amount of risk in undeveloped real estate. Also known as raw land investments, these come in many forms. And many people will tell you that land is always an excellent investment because of the basic tenets of the market: supply and demand.
While it’s true that there is a finite supply of land available, it doesn’t automatically make every piece of land for sale a good investment. However, there are different land investment types for different investors. And there are certain traits that make land investments attractive. The benefits of undeveloped real estate as an investment include:
- It’s relatively easy to purchase.
- It provides flexibility — build, hold, lease, or sell.
- Direct land investments give investors a place to enjoy nature.
- There’s often little competition.
- Compared to other real estate, it’s very cheap to maintain.
- Passive income is possible when done right.
Different Land Investments
The traditional real estate investment market — which includes houses, apartments, and commercial properties — is a crowded and hectic place for those who don’t know their way around. But the land investment market is, at least for now, much more manageable. And there are different types of investments you can use for diversification. Here are a few.
Residential and Commercial Lots
A land lot’s zoning will determine how it will be developed when the time comes to build. These investments take a fair amount of research and work to determine whether they’ll be profitable and how long before they’re likely to be used for building.
A large residential zoned area can be split up into smaller lots for a housing development. A commercial lot can host anything from a warehouse, storage facility, gas station, or one of many other options. When done right, these investments can bring a significant return.
Small farm land investments are another option for diversification. However, to make them pay off, the investor needs to be familiar with the agricultural industry. Knowing what’s likely to thrive on the land is half the battle. But for those investors who may have a working knowledge of farming, these land investments can be good options.
Row Crops or Livestock
Row crops and livestock investments are similar to farming investments but are usually more complicated. It include things like corn, cotton, potatoes, and soybeans. Often, the investment thrives when you lease the land to a farming company. But this also requires a knowledge of the row crops or livestock that will be raised on the land.
Buy and Hold
Most investors who simply want to diversify their portfolios don’t have the time or inclination to research crops or farms or livestock. This is why buy-and-hold land investments are often best for the typical investor. To be fair, this type of investment requires some research and due diligence, but not as much as the methods above.
At Land Elevated, we recommend this type of investment for those who would like to have a piece of land they can use while their investment matures. Whether it’s for camping, hunting, hiking, or even growing some small crops of their own, land that gets gently used can still provide an excellent investment.
For those who don’t necessarily want to own their own piece of raw land and prefer a completely hands-off approach to investing, there are land-based ETFs. If you’re not familiar, ETFs are Exchange-Traded Funds. They’re pooled investments that can be bought and sold like regular stocks.
So for those who want to invest in land without actually owning any, Real Estate Investment Trust (REIT) ETFs are a good option. You can find exchange-traded funds that represent a wide variety of companies in various sectors, such as farming, agriculture, industrial, residential, and retail.
Owning Land as an Investment
While buying land-based ETFs can certainly diversify your investment portfolio, you don’t actually get to enjoy any of the land you’ve invested in. If you want to have a piece of land that you can enjoy while diversifying your portfolio, you can purchase a piece of raw land easily.
How you go about purchasing the land and how you plan to use it will determine your overall return on investment. By far, the best way to maximize your land investment is to purchase the property outright with cash or a favorable third-party loan.
The more interest you have to pay on a land loan, the smaller your potential return will be. With a cash payment, you can often get a large discount and, of course, you won’t have to pay interest on a loan.
And since undeveloped land is considerably cheaper than developed real estate, even small investors are likely to find a plot that fits their budget.
Land as a Hedge Against Inflation
One of the major benefits of owning land as an investment is it serves as a great hedge against inflation. While it’s good to have a diversified portfolio and enough cash for emergencies, there’s a limit to this. Any savings you may have in your savings account likely isn’t keeping up with inflation, which means it’s losing value.
And since inflation strongly affects the stock market, it can be hard to avoid the negative effects of inflation, even with a traditionally diversified portfolio. Fortunately, like gold, land isn’t affected by inflation. In fact, it usually moves in opposition to the market.
Land, like gold, is already at its ceiling. There’s a finite amount of it, and investing in it is one great way to hedge inflation and mitigate risk in our turbulent financial markets. So if you own quality land and a diversified investment portfolio, you can rest easy knowing that even if inflation gets out of control, your land is likely to hold or increase in value over time.
Know the Risks of Owning Land
It’s important to go into any investment opportunity with eyes wide open. And land is no exception. That’s why we recommend that only those who want to own land buy it outright as an investment. If you think you’ll get use out of the land, then it’s a good sign that you can mitigate some of the financial risk. Many people purchase land on which to build a house or a cabin when the time is right. Or they use it for family camping trips. Some even like to buy woodland to offset their carbon footprint.
When you enjoy the land, it’s no longer just a monetary investment. It’s an investment in your life, your time, and your enjoyment. And quality time spent on land can’t be stolen by market downturns or fluctuating prices.
Of course, it’s also important to remember the cardinal rule of any investment: never spend money you don’t have to lose. Because while the chances of your land dropping in value significantly are extremely low, you may not be able to sell it for a massive profit right away. But if you use the land, then it’s a good investment until you can sell it for a profit.
Whether you’ve dreamed of owning land your whole life or you just want to diversify your investment portfolio, there’s a land investment for you. Those who want to invest in land from afar can do so through REIT ETFs. Those who want their own land have a little more research to do but are likely to find a plot of land that suits them and their investment needs.
Either way, make sure you’re clear on what you want out of your investment. Whether that’s a quick return or a place to make memories with your family — or both — knowing what kind of risk you can assume and how much you want to be involved is key to investing in raw land.