Purchasing a Land vs 2nd home (Kaufman: sales, real estate, rental)

[ritholtz]

We bought our first home 10 years back. Was thinking about buying 2nd home few years back, then got busy with work. Time just few buy. Then COVID happened. Is it worth investing in Land? Homes seem to be very expensive and too far out to invest as 2nd home. Any recommendations on area to focus on land purchase. We have to go out by a lot i guess to get a reasonable price.

[TeamLynn]

Land could be good, depending on what you buy.
Remember land typically generates expenses and no income for investment.
Not 100% but often.
So you'll pay taxes, insurance, any maintenance like mowing, fences, etc.
Buy in the path of progress, so you want city moving that way.

I think just land purchase is more risky of know where the value will go. Very tough to project.

Also buying land typically requires more cash/less leverage. Tougher to find financing if you need that. Rare to see 5% down or anything like that. Probably more often you will need 50% down.

Be careful buying in a place with HOA. I see some HOAs $1000 a year or more and do that for 10 years really adds up along with your other expenses.

Always tricky I think to know when to sell. Does someone want to build a new house in a 20 years old neighborhood? Does someone want to be the first in a slow sell neighborhood? Do you risk what you build only to have people build something entirely different around you?

If you buy a rental or AirBnB you may have some of the same issues, but at least you have income to offset some of these ideas.

[escanlan]

Originally Posted by ritholtz

We bought our first home 10 years back. Was thinking about buying 2nd home few years back, then got busy with work. Time just few buy. Then COVID happened. Is it worth investing in Land? Homes seem to be very expensive and too far out to invest as 2nd home. Any recommendations on area to focus on land purchase. We have to go out by a lot i guess to get a reasonable price.

Purchasing a single lot (typical home sized lot) is not IMO a good investment. Depending on where you want to buy you might not even be able to leave it vacant due to local rules, HOA rules, etc., etc.


Buying land in larger parcels can be risky if you do not, as TeamLynn stated, "Buy in the path of progress". To make any real money on that you would need to buy far enough out where the sales prices may be low, hold longer term in hopes that progress does move in that direction, and then not get shorted if progress does not move that far out or other detrimental land use projects occur close by.



When you buy raw land tracts you also need to be very careful of the size tract you buy. If you buy to small of a tract (larger than single homes) it may not be conducive to farm operations to lease for farming which can pay your taxes easily. At that point you're stuck with land you might have to maintain which can be very expensive if there is no return. If you purchase a larger tract that is conducive to lease for farming and are not careful in your research you can easily have the value of the land for future development reduced by projects you did not know were coming. It can also be less valuable if you find there are old right of ways on it that you did not closely check into.



You can certainly make money on raw land but unless you have money to burn it takes proper research to help minimize the chance it does not become just another expense with no future in it for profit.

[ChristieP]

Be very careful about sellers advertising "ag exempt low taxes." The rules for keeping an agricultural exemption are very strict. The type of agriculture use must continue to keep the exemption, especially when the property changes hands. So if the land is currently used as a cow pasture, it must continue to be used as a cow pasture. If you decide you want to use it for hay instead, then you lose your ag exemption for at least 5 years. In order to get it back, you have to show the county that the new agricultural use has been consistent for 5 years, which means you'll have to show receipts and invoices for having the hay baled and mowed (which can be expensive). If you just let the land sit, and don't run cattle or bale hay on it, then you will pay full taxes on it. Also you must have at least 10 acres in order to claim an ag exemption.

Cheap land in far-away places will not increase much in value. Land that's close to DFW is quite expensive. For example, bare land near me in Kaufman County is going for between $50-75,000 per acre.

[Wittgenstein's Ghost]

Originally Posted by ritholtz

We bought our first home 10 years back. Was thinking about buying 2nd home few years back, then got busy with work. Time just few buy. Then COVID happened. Is it worth investing in Land? Homes seem to be very expensive and too far out to invest as 2nd home. Any recommendations on area to focus on land purchase. We have to go out by a lot i guess to get a reasonable price.

Real estate is often a good investment because it's leveraged and generates cash flow. Neither of those things typically apply to land (if it is leveraged, rates are often too high for this to be a good thing).

[ritholtz]

Originally Posted by TeamLynn

Land could be good, depending on what you buy.
Remember land typically generates expenses and no income for investment.
Not 100% but often.
So you'll pay taxes, insurance, any maintenance like mowing, fences, etc.
Buy in the path of progress, so you want city moving that way.

I think just land purchase is more risky of know where the value will go. Very tough to project.

Also buying land typically requires more cash/less leverage. Tougher to find financing if you need that. Rare to see 5% down or anything like that. Probably more often you will need 50% down.

Be careful buying in a place with HOA. I see some HOAs $1000 a year or more and do that for 10 years really adds up along with your other expenses.

Always tricky I think to know when to sell. Does someone want to build a new house in a 20 years old neighborhood? Does someone want to be the first in a slow sell neighborhood? Do you risk what you build only to have people build something entirely different around you?

If you buy a rental or AirBnB you may have some of the same issues, but at least you have income to offset some of these ideas.

Thanks for the information.

[ritholtz]

Originally Posted by escanlan

Purchasing a single lot (typical home sized lot) is not IMO a good investment. Depending on where you want to buy you might not even be able to leave it vacant due to local rules, HOA rules, etc., etc.


Buying land in larger parcels can be risky if you do not, as TeamLynn stated, "Buy in the path of progress". To make any real money on that you would need to buy far enough out where the sales prices may be low, hold longer term in hopes that progress does move in that direction, and then not get shorted if progress does not move that far out or other detrimental land use projects occur close by.



When you buy raw land tracts you also need to be very careful of the size tract you buy. If you buy to small of a tract (larger than single homes) it may not be conducive to farm operations to lease for farming which can pay your taxes easily. At that point you're stuck with land you might have to maintain which can be very expensive if there is no return. If you purchase a larger tract that is conducive to lease for farming and are not careful in your research you can easily have the value of the land for future development reduced by projects you did not know were coming. It can also be less valuable if you find there are old right of ways on it that you did not closely check into.



You can certainly make money on raw land but unless you have money to burn it takes proper research to help minimize the chance it does not become just another expense with no future in it for profit.

Thanks for the information. Which side of dfw we need focus to buy in the path of progress? Any suggestions.

[ritholtz]

Originally Posted by ChristieP

Be very careful about sellers advertising "ag exempt low taxes." The rules for keeping an agricultural exemption are very strict. The type of agriculture use must continue to keep the exemption, especially when the property changes hands. So if the land is currently used as a cow pasture, it must continue to be used as a cow pasture. If you decide you want to use it for hay instead, then you lose your ag exemption for at least 5 years. In order to get it back, you have to show the county that the new agricultural use has been consistent for 5 years, which means you'll have to show receipts and invoices for having the hay baled and mowed (which can be expensive). If you just let the land sit, and don't run cattle or bale hay on it, then you will pay full taxes on it. Also you must have at least 10 acres in order to claim an ag exemption.

Cheap land in far-away places will not increase much in value. Land that's close to DFW is quite expensive. For example, bare land near me in Kaufman County is going for between $50-75,000 per acre.

Some one from spouse office purchased somewhere around Kaufman long time ago. I guess they are counting millions now. Thanks for explaining issue with tax exemptions.

[ritholtz]

Originally Posted by Wittgenstein's Ghost

Real estate is often a good investment because it's leveraged and generates cash flow. Neither of those things typically apply to land (if it is leveraged, rates are often too high for this to be a good thing).

Need to look for homes which can generate cash flow. Have to go too far out and not sure if we can get a good rent. Even town homes are also going for steep price. Feel free to give some suggestions and areas to invest in second home. As of now investing in stock market / money market fund is my option.

[ChristieP]

Another thing to consider when buying a rental property is repairs. If the house is far away from you, and in a community where you are unfamiliar with the area, who will you call in the middle of the night when the tenant tells you there's a big plumbing leak? And are you prepared to have to completely repaint/recarpet when your tenant moves out and leaves the place a mess? There are several regular posters here who can give good advice about being a landlord. (Rakin is one of them.) If you're new to the process, you might be better off using a property management company even though they do charge a fee for their services.