Residential and Commercial Land Investments

Residential and Commercial Land Investments

Residential and Commercial Land Investments

Residential and commercial land development offers a feasible entryway into investment because virtually an unlimited number of land development opportunities can be structured to meet an investor’s capital and time constraints. For most small investors, real estate investment trust (REIT) ETFs are an ideal choice because they do not require direct management, they are broadly diversified by property type, they are geographically diversified, they can be purchased or sold on a real-time basis, and they are very inexpensive. Some specialize in a type of real estate, but others, such as the Vanguard REIT ETF (VNQ), provide diversified exposure to industrial, office, retail, healthcare, public storage, and residential property developments

Unfortunately, these types of investments negate the ability of the landowner to enjoy using the land. Therefore, residential and commercial land developments are not feasible options for people that want to truly experience the feeling of land ownership.

Row Crop Land and Land for Livestock Operations

Land purchased for row-crop farming or for running a livestock operation affords the ability to enjoy land in the homeowning sense, as well as from the standpoint of generating income. However, there are a host of problems for small investors who purchase land in order to operate these types of enterprises. First, the scale required to operate a row-crop operation or livestock operation has to be very large to be financially viable. This, in turn, requires a significant upfront capital outlay far beyond what most people can afford. Moreover, the ongoing fixed costs associated with running these types of farming operations are extremely high.

This, in turn, means that the financial leverage and business risk for such operations are very high as well. As a result, a significant amount of stress is put on the landowner to make these types of business ventures financially successful. In many cases, the stress level far exceeds the benefits that people yearn for as landowners. With this in mind, it is a fair assessment to say that most small investors should avoid pursuing these types of large-scale farming operations, as the risks and hardships of such activity will likely exceed any benefits.

While owning a traditional row-crop or livestock farming operation is probably not feasible for most small investors, many agricultural investment options provide acceptable investment exposure to traditional farming enterprises. For example, some funds provide exposure to soybeans, corn, wheat, cotton, sugar, coffee, soybean oil, live cattle, feeder cattle, cocoa, lean hogs, Kansas City wheat, canola oil, and soybean meal. Therefore, by investing in this product, small investors will have broad investment exposure to traditional farming operations. This, in turn, can be used by the investor to help keep abreast of traditional farming practices, as well as to generate an attractive return on investment over time.

Small investors can also utilize a variety of exchange traded notes (ETNs) to invest in specific types of traditional farming operations. For example, the iPath Bloomberg Agriculture Subindex Total Return ETN (JJATF) provides investment exposure to soft commodities such as corn, wheat, soybeans, sugar, cotton, and coffee, and the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) provides investment exposure to cattle and hogs.23
 

In terms of utilizing ETFs and ETNs as land- and agriculture-related investment options, investors need to understand that many of these types of products use derivative instruments such as futures contracts to generate market exposure. As a result, investors need to perform a thorough due diligence on these types of investments to fully understand their potential risks and rewards. Nevertheless, the use of ETFs and ETNs are likely to pose the best opportunity for engaging in traditional large-scale farming operations.

Small Farm Investment Opportunities

For small investors to truly enjoy the more traditional sense of land ownership, perhaps the best options are timber farms, mineral development lands, vegetable gardens, orchards, vineyards, and recreational land. These types of agricultural endeavors are much more attractive to small investors: The scale of the land purchase can be tailored to meet the investor’s capital constraints; operations have the potential to generate an ongoing income stream, and investors can enjoy being on the land while it is being used.

 With that said, a host of ETFs and ETNs also are directly tied to these types of farming endeavors. Therefore, small investors may want to consider investing in them, if they decide that running a small-scale farming operation requires too much of their time and resources.
 The Invesco MSCI Global Timber ETF (CUT) is designed to track the performance of timber companies around the world and includes holdings in firms that own or lease forested land and harvest the timber for commercial use and sale of wood-based products.4
 

In addition, the SPDR S&P Oil & Gas Exploration & Production ETF Fund (XOP) is one of the many investment options that provide exposure to mineral land development.5

Issues to Consider

Once the decision has been made to purchase raw land as an investment or for development, investors need to understand many issues about the legalities associated with the use of specific parcels of property. For example, land-use restrictions may curtail the manner in which the land can be used by the owner, land easements may grant access to a portion of the property to an unrelated party, and the conveyance of mineral rights may grant an unrelated party the authorization to extract and sell minerals for financial gain.

In addition, riparian and littoral rights may stipulate the access that the landowner has to adjacent waterways, and the lay of the land may dictate if it lies in a flood plain, which would greatly impact the manner in which the land could be utilized. Fortunately, prospective land buyers can get answers to these questions by reviewing the legal specification for a parcel of land, which is found in a document known as a land deed. This type of document is typically available to the public via the internet, or it can be obtained the old-fashioned way, by visiting the land records and deeds division of the appropriate county clerk’s office.

In addition to legal issues, small investors should consider the land’s access to basic utilities such as electricity or telecommunications. Investors should also review the land’s annual property-tax obligation, assess the potential for trespassing violations, and analyze the remoteness of the land from the landowner, as well as from the nearest community. All of these issues are important, because the lack of utilities may greatly hinder the ability to utilize the land, the land’s remoteness may impact the opportunities a landowner has to enjoy the property, and property taxes may impact the land owner’s finances. With these issues in mind, prospective landowners should undertake a comprehensive due-diligence assessment before deciding to purchase land

Disclaimer: This article is originally published on https://www.investopedia.com/

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