If you're considering investing in commercial real estate, now is an exciting time for you. The right property can provide you with additional annual income and a handsome return if you decide to sell it in the future. But amidst numerous options, one often overlooked idea is buying land for investment. While it may not seem as glamorous as other property types, we're here to reveal why this might just be the best choice for your portfolio. In this article, we will explore everything you need to know about purchasing land and present 11 compelling reasons why buying land is a smart investment.
What Sets Retail Property Apart?
Retail real estate encompasses properties that consist of shopping and entertainment establishments. This can include clothing stores, grocery stores, restaurants, and any other business that sells products and services directly to consumers.
Key Terms to Familiarize Yourself With
Before delving into land investment, it's important to understand a few key terms:
- Air Rights: The space above the land that grants you the ability to use, rent, or develop that space.
- Building Height Restrictions: The limitations imposed on the maximum height of structures on a particular piece of land.
- Floor Area Ratio (FAR): The total floor area of a building in relation to the plot of land it occupies, which every property must adhere to.
- Ingress and Egress: The right of a property owner to enter (ingress) and exit (egress) the property, especially crucial for land without direct road access.
- Mineral Rights: The rights to extract minerals such as oil, gas, coal, metal ores, stones, sands, or salts from the land.
- Parcel of Land: A defined lot of land determined by the county, city, or municipality.
- Permitted Uses: Other uses for the land that may be allowed by city or county officials despite zoning regulations.
- Raw Land: A plot of land without any established structures, which can be used for commercial or residential development, farming, or the harvesting of natural resources.
- Subdividing: The process of dividing a lot into separate sections for distinct development purposes.
- Topography: The physical features and shape of the land, including hills, vegetation, and flat areas.
- Water Rights: The property owner's right to utilize any bodies of water on their land, provided it doesn't affect other properties downstream.
- Zoning: The regulations that govern a piece of land's designated use as defined by the county or municipality.
- Zoning Variance: A request made by the property owner to use the land for purposes not permitted by existing zoning regulations.
11 Compelling Reasons to Invest in Land
Considering investing in raw land? Here are some compelling reasons why this is an excellent idea:
1. It's Inexpensive
Vacant land offers a significant advantage in terms of affordability. Unlike properties with structures, the absence of physical buildings significantly reduces the price. Even if you plan to develop the land in the future, you can still treat it as a valuable investment. This makes it an ideal entry point for new investors with a limited budget.
2. Less to Worry About
Properties with existing buildings often come with their fair share of upkeep and potential issues. Extensive inspections are necessary to identify potential problems and select reliable tenants. Additionally, managing vacancies can be a challenge. However, with raw land, you can bypass these concerns, making the buying process simpler and less stressful.
3. Minimal Maintenance
Unlike properties with structures that require regular maintenance, raw land demands very little attention. There are no buildings to maintain, no security issues to worry about, and no utility bills to cover. This hands-off investment ensures you won't have to invest significant time or effort into property upkeep.
4. Fewer Ongoing Expenses
Due to the absence of buildings, raw land incurs minimal ongoing expenses. There are no utility bills to cover, and property insurance and taxes remain limited if you decide not to develop it. Additionally, you'll avoid the depreciation of buildings and other assets on the land, reducing your overall risk.
5. Greater Development Possibilities
Investing in properties with existing buildings often limits your options for changes or redevelopment. However, with vacant land, you are only bound by zoning regulations. Furthermore, you may be granted exceptions based on permitted uses or zoning variances. This flexibility gives you a multitude of options for development and helps you maximize the land's potential.
6. Scarcity of Raw Land
As more vacant lots are transformed into residential developments, retail centers, or industrial properties, the supply of raw land diminishes. This scarcity makes raw land a valuable commodity for investors. Limited options for those seeking land can lead to higher prices when it comes time to sell your property.
7. Less Competition
Compared to developed properties, vacant lots generally attract less competition from investors. Many overlook the potential and possibilities of raw land. This gives you an advantage when searching for properties and allows you to discover hidden gems that others may have missed.
The Downsides of Investing in Retail Property
While there are numerous benefits to investing in retail property, it is essential to consider potential drawbacks:
1. Vulnerability to Economic Downturns
Retail businesses are often profoundly affected by economic downturns. If your tenants face financial difficulties and close their businesses, you may experience unexpected vacancies. Diversifying your tenant base can provide some protection, but it is still important to anticipate temporary losses during a recession.
2. Challenges in Finding New Tenants
Starting a new business and renting commercial space is not always a top priority for entrepreneurs. If you encounter vacancies, it can be time-consuming to find suitable tenants. However, longer lease terms offer some stability and mitigate this concern to some extent.
3. Influence of Area Changes on Property Value
The value of any real estate property is heavily influenced by its location, and retail properties are no exception. Stores thrive on foot traffic, so any factors that reduce accessibility or customer volume could negatively impact your property's value. Changes such as the relocation of popular businesses or alterations in traffic patterns can significantly affect the desirability of your location, leading to lower rents or difficulty in attracting tenants.
Finding the Right Retail Property
Once you decide to invest in retail real estate, it is crucial to find the right property that suits your needs. Here are some tips to guide you:
Choose a Prime Location
An excellent location plays a vital role in attracting potential tenants. Look for properties near popular big-box stores that draw customers to the area. Ensure easy accessibility and ample parking, either on the property or nearby. Seek out up-and-coming areas with a surge of new businesses and steer clear of areas where businesses are relocating or closing down.
Assess Property Condition
Maintenance and repairs constitute a significant portion of property ownership costs. Moreover, businesses prefer attractive spaces that can lure customers. Therefore, it is vital to find a property that is in good condition. Hire an inspector to thoroughly evaluate the property and provide insights on any potential concerns. If you find a property in need of repairs but are still interested, negotiate a tenant improvement allowance (TI) to cover the renovations before occupancy.
Evaluate Financial Aspects
Before investing, it is crucial to ensure profitability. Consider two key metrics:
- Net Operating Income: Determine your annual income by subtracting the property's operating expenses and vacancy from its scheduled gross income.
- Capitalization Rate: Estimate the rate of return on your investment by dividing the net operating income by the property's value.
Review Existing Leases
Understanding the lease structure currently in effect is vital, as it impacts the level of involvement required on your part. Absolute net leases place all expenses and responsibilities on the tenant, while triple net leases only require involvement in major repairs. Double-net leases necessitate your coverage of taxes and building insurance, while maintenance and repairs are your responsibility. Full-service leases require you to handle everything. Familiarize yourself with the lease terms to gauge your level of commitment.
Seek Expert Assistance
Engaging the services of a commercial real estate broker, particularly for new investors, is highly recommended. A knowledgeable broker can help you identify properties that meet your criteria, arrange inspections, and guide you through the negotiation process. Their expertise and advice are invaluable when making a significant real estate investment.
Conclusion
Investing in retail properties can be a lucrative decision for the right investor. However, thorough research and evaluation of your options are crucial. With the right approach and proper due diligence, investing in land can provide you with substantial returns and serve as a smart addition to your investment portfolio.