Property, Not Land, Yields Returns

The Urban Land Institute's latest report, Emerging Trends in Real Estate 2012, states that land in general is a sound investment, citing an increase in housing and commercial construction and rising land values in markets around the country. But as Jason Hartman points out, land – as opposed to property – is a highly speculative kind of investment. Land investment offers virtually none of the benefits of rental income property for building long-term wealth. It's not the land itself that provides the key returns on the investment -it's the structures on the land.

One way to invest in real estate has been to buy land at low prices and either build new structures on it, which can then be rented or sold, or hold the land against a future time when it can be sold for a higher price. But as Jason Hartman says, land is a highly speculative investment for just those reasons. Land values may rise in some markets, but the potential for a return on that land depends on other factors.

In order to see a return on a land investment, the land must have something to offer, and vacant land offers little in the way of ongoing returns on the investment, Rather, this kind of purchase gobbles money in the form of property taxes and any other costs deriving from local and state ordinances. Land values may fluctuate, but it's the structures on the land which can appreciate and yield income.

But building those structures depends on conditions in the housing market o

verall. In markets where construction is flat and building costs are high, it may be prohibitive to develop that piece of land. The prices of the commodities that go into the building of a house or other structures fluctuate too, depending on demand and availability. It may take years to see a return on a new house or multiplex placed on that cheap piece of land.

Likewise, holding land against future demand and higher returns is highly risky. Investors taking this path are gambling that years from now, the land will be worth more for its location, or that eventually developments on the land will yield a big enough return to justify the investment. Since trends are fickle and the costs associated with owning that land still have to be paid whether the investment yields an income or not, the chances for a significant return become smaller and smaller.

But investing not just in land but also in property – which includes land, structures and everything – is a sound strategy that secures a long-term income. Although land is finite and static, improvements – and the potential for improvements – to structures on the property are dynamic. With maintenance and upkeep, both tax-deductible, and the booming rental market to keep a wide

pool of available tenants ready to rent, the “packaged commodities” of housing structures on a piece of land represent solid investment opportunities that can't be reaped from land

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alone. (Top image: Flickr/JoNaylor)

The American Monetary Association Team

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