How to Invest in Land and Make Money: A Guide

Discover effective strategies for how to invest in land and make money, from ownership to ETFs, and unlock the potential for profitable returns in real estate.

It's often been said that investing money in land is a smart move, given its scarcity. But before you dive headfirst into the world of real estate, it’s essential for investors to grasp the nitty-gritty of land ownership and the intricacies of running a land-based business. Not to mention, they should familiarize themselves with the various land-related investment options available through products like exchange-traded funds (ETFs) and exchange-traded notes (ETNs). 

- Investing money in land can be a gamble; it might not yield any income or capital gains when sold.

- Common land investments include residential and commercial development, cropland, livestock land, vineyards, orchards, mineral production land, and recreational land.

- Investors should be aware of the specific land-related investment options available through ETFs and ETNs.

- For most small investors, real estate investment trust (REIT) ETFs are a cost-effective choice, requiring no direct management, offering broad diversification, and allowing real-time transactions.

- Various ETFs and ETNs cover most land-based investment categories, including timber, minerals, and farming.

Types of Land Investments

While the independently wealthy can buy land for personal use, recreation, and investment, most folks don’t fall into that category. This raises an important question: Can land ownership and business ventures yield a satisfactory return on investment for small investors while still allowing them to enjoy the perks of land ownership? To tackle this, one must evaluate ten general categories of potential land investments:

- Residential development land

- Commercial development land

- Row crop land

- Livestock-raising land

- Timberland

- Mineral production land

- Vegetable farmland

- Vineyards

- Orchards

- Recreational land

Residential and Commercial Land Investments

Residential and commercial land development can be a viable entry point for investment, as the opportunities are virtually limitless and can be tailored to fit an investor’s capital and time constraints. For most small investors, REIT ETFs are an ideal choice. They require no direct management, are diversified by property type and geography, can be bought or sold in real-time, and are relatively inexpensive. Some REITs focus on specific real estate types, while others, like the Vanguard REIT ETF (VNQ), offer diversified exposure across various property developments. 

However, these investments often come at the cost of the landowner’s ability to enjoy the land itself. Thus, residential and commercial land developments may not be suitable for those seeking the true essence of land ownership.

Row Crop Land and Livestock Operations

Purchasing land for row crop farming or livestock operations allows for a dual benefit: enjoying the land as a homeowner and generating income. However, small investors face numerous challenges when venturing into these enterprises. The scale required for financial viability is substantial, necessitating a hefty upfront investment that most can’t afford. Additionally, the ongoing fixed costs of running these operations are exorbitantly high, leading to significant financial risk and stress for the landowner. 

Consequently, it’s prudent for most small investors to steer clear of large-scale farming operations, as the risks and hardships often outweigh the benefits. While traditional farming may not be feasible, various agricultural investment options provide exposure to farming without the heavy lifting. For instance, some funds offer exposure to crops like soybeans, corn, and wheat, allowing small investors to stay connected to traditional farming practices while potentially reaping returns over time.

Small Farm Investment Opportunities

For those yearning for a more traditional sense of land ownership, timber farms, mineral development lands, vegetable gardens, orchards, vineyards, and recreational land present attractive options. These agricultural endeavors can be scaled to fit an investor’s budget, offer potential income streams, and allow for enjoyment of the land during its use. 

Moreover, a plethora of ETFs and ETNs are linked to these farming ventures. For example, the Invesco MSCI Global Timber ETF (CUT) tracks timber companies globally, while the SPDR S&P Oil & Gas Exploration & Production ETF Fund (XOP) provides exposure to mineral land development.

Issues to Consider

Once the decision to purchase raw land is made, investors must navigate a labyrinth of legalities. Land-use restrictions may limit how the property can be utilized, easements might grant access to others, and mineral rights could allow third parties to extract resources. Additionally, understanding riparian and littoral rights is crucial, as they dictate access to adjacent waterways, and knowing if the land lies in a floodplain can significantly impact its use.

Prospective buyers can find answers to these questions in a land deed, typically accessible online or through local county clerk’s offices. Beyond legalities, small investors should evaluate the land’s access to utilities, annual property tax obligations, potential trespassing issues, and its distance from communities. Each of these factors plays a vital role in the land’s usability and the owner’s enjoyment.

General Overview of Land Valuation

Investing money in land is inherently speculative. Since undeveloped land doesn’t generate income, any return hinges on potential capital gains upon sale. The cost of debt for farm real estate loans can inform preliminary investment analyses. However, raw land often presents an unattractive return on investment, especially considering the lengthy ownership periods typically required to realize gains. Rising interest rates for farmland loans could further complicate future purchases.

If the allure of investing money in land persists despite these challenges, numerous valuation reports are available through public state universities’ agricultural departments. These reports can guide small investors in establishing timber farms, vegetable farms, vineyards, or orchards, detailing the necessary work, capital outlay, and expected returns.

Ultimately, it’s crucial for investors to recognize that venturing into small-farm business enterprises is fraught with difficulty and risk. Beyond the usual business challenges, farming introduces unique hurdles such as crop diseases, pest infestations, unpredictable weather, and fluctuating market prices. The physical demands and stamina required for farming mean that most investors may struggle to sustain such operations over time.

The Bottom Line

Investing money in land is a risky endeavor, as it typically generates no income and may not yield capital gains upon sale. Utilizing a farm real estate loan for land purchases adds another layer of risk. Therefore, it’s advisable for most small investors with aspirations of land ownership or small farming to explore the diverse array of ETFs and ETNs now accessible to them. These investment products can fulfill their desire for land-related activities while potentially offering reasonable returns over time.

How to Invest in Land and Make Money: A Guide

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