- The Washington Times - Wednesday, November 9, 2005

QWhat do you think about buying land as a long-term real estate investment? It seems that you can make a lot of money if you buy in an area that will have future development.

A: Although land doesn’t require upkeep and tenants, it does require financial feeding. Investing in land is a cash drain. Unless you have a lot of cash sitting around, because it costs money to purchase land, you will have a mortgage payment to make.

Mortgage lenders charge higher interest rates on loans to purchase land because they see it as a more speculative investment. You also don’t get depreciation tax write-offs because land is not depreciable.

If you pay cash, you will have money tied up in the investment. You will also have property tax payments to meet, as well as other expenses. But you will have no income from the property to offset these expenses.

If you do someday want to develop the property, that will cost a hefty chunk of money. Obtaining a loan for development is challenging and more expensive than for a developed property.

Identifying, many years in advance, which communities will experience rapid population and job growth is not easy. Land prices in those areas believed to be the next hot spot already sell at a premium price. If growth doesn’t meet expectations, appreciation will be low or nonexistent.

If you are going to invest in land, be sure that you can afford it. Tally up what your annual carrying costs will be so that you can see what the annual cash drain will be. What will be the financial consequences of this outflow? For example, will you be able to fully fund your tax-deductible retirement accounts? If you can’t, the lost tax benefits are another cost.

Also understand what further improvements the land needs. Running utility lines, building roads, landscaping and so on all cost money. Especially if you are planning on developing and building on the land, research what these things will likely cost. Don’t make these estimates with your rose-colored glasses on; improvements almost always cost more than people expect.

KING FEATURES SYNDICATE

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