What is the difference between investing in land and real estate development?
When it comes to investing in land or real estate development, most people might get confused a little bit due to its similarity. Now we will explain to you what the differences are between these two terms.
Investing in land happens when you want to become an investor in the land. It refers to the time when you purchase and own land as part of your property portfolio. Moreover, you made a profit by buying it and then keeping it until you sell it at a higher price. When you become a land investor, you will still have some time to operate your other business or even work a full-time job. Since you don’t need to spend hours maintaining your properties like when you develop them. If you are a land investor and just keep it until its price increases and sell it later, the amount of profit might not be as high as when you develop real estate.
As for investing in real estate development, you will become a real estate developer rather than just an investor. It happens when you buy a property such as land that has nothing but you add more capital in developing this land into any kind of property that will help you gain profit or income later. For example, you buy forest land and then you use your additional money to develop that area into a resort or you build community houses for selling to other buyers. In short, when you invest your money in developing real estate you will build your property from scratch with the intention to sell it later for a high profit. But you need to be aware that if you want to become a real estate developer you need to be responsible for many things such as planning, designing, financing, marketing, hiring, and selling. Additionally, you need to know that there is risk happening during your process of developing your real estate more than being a land investor.
These two types of investments provide different sources of income or profits. And there are many differences between a land investor and a real estate developer. Both require different skills and amounts of time to invest within these two types of investment in the real estate sector. And if you need to decide which one you should put your money in you can make a decision later after reviewing both pros and cons of these two types of investments.
Pros and Cons of investing in land
Pros of investing in the land:
- Less investment cost: As we know that buying land lets you spend less money than buying a house or developed land. That is why buying or investing in the land will require less money from your own pocket rather than buying other types of properties. Especially, if you have a small budget and are looking for an investment opportunity in the real estate sector, investing in land is the first step you should try at the beginning of your real estate investment journey.
- Multiple uses: Another advantage of investing in land is that you will be capable of doing anything later with your land. You can customize it for any purpose of use in the future or later once you have already bought it. For example, after you bought for 1 or 2 years you might have more capital and sometimes people want to use their land in building a house, farm, or any other type of purpose. It means you will have a lot of options in using your land after buying it.
- Possible higher resale return: The value of the land property can be higher than your buying price as the economic situation in your country prospers. The real estate value will keep increasing if the condition of your land remains good and especially if the location of your land is at the potential location.
- Less maintenance: Usually, the cost of maintenance of a plot of land is lower than a constructed property or land. Moreover, the time that you invest in its maintenance is also not much compared to houses, buildings, and more.
Cons of investing in the land:
- Shortage of land supplies: Demand and supplies of land should be a concern if the situation of your country or location is growing. At the time demand for land is growing, supplies of land can be decreasing which leads to a higher price of land. Therefore it might be hard sometimes for you to start investing in the land at the time when this type of situation happens in your country.
- Illegal land properties: In most rural areas, some land owners might face illegal issues regarding their land property. Therefore before you make any purchase of the land you need to cross-check the community department in that area such as in its district or commune to avoid any misleading owner or illegal land.
- Illiquid asset: Owning land property can be hard sometimes if you suddenly need immediate cash from selling it. As we all know that finding a buyer is not an easy job as we might need to go through a lot of steps before finding the right buyer for your land. Moreover, sometimes you still undergo a lot of negotiations which can take time to settle.
- Problem with availing finance: If you decide to take a loan in investing in land, then it will be very risky to do that. Since there is monthly interest that you need to pay as well as other types of expenses it sometimes makes you sell it immediately to pay out your debt as you don’t have any cash in hand. Selling immediately will make you sell it at a lower price than its actual market price so you will lose the chance of gaining profit from investing in your land.
- Tax compliance: In most countries, you will need to pay taxes for owning any type of property. Therefore paying taxes will be a part of your expenses. You better check out tax regulations in your country in case you are not aware of this.
Pros and Cons of investing in real estate development
Pros of investing in real estate development:
- High return on investment: Since you buy the property with the purpose of developing it, therefore there is a high chance that you will be receiving a higher return once you are successfully developing it. There are multiple options and ways to gain profit or income through your real estate development plan.
- Greater stability: As time goes by, we have seen that investing in property or real estate is one of the most stable investments when compared to other investment options. Even Though sometimes the price of your property is going up and down over time but remember that the property market might be less volatile than other markets like cryptocurrencies or the stock market.
- Investment leverage opportunity: The ability to purchase your property requires less than you have. You can take out your bank loan to buy your favorite property type. As you might know, the bank is happy if you request a loan for buying assets like real estate since we all know that it is more stable than most investments.
Cons of investing in real estate development:
- Illiquid property: Unlike any other investment like Forex, cryptocurrency or stock investment, investing in real estate development will give you less opportunity to sell your property immediately when you need cash. It takes time and sometimes you need a few months or even years to sell your real estate properties within your development plan.
- Unexpected problems and risks: We might be aware that investing in real estate development takes longer than you think and it involves a lot of things behind it. There is more risk for you to deal with when you invest in your real estate development plan.
- The barrier to entry: If you are a first-time real estate developer, then you need to do some research about any additional costs in managing your real estate development plan. As time goes by, there may be some expenses which you need to make, like tax, any stamp duty, and more.
To sum up, these two types of real estate investment have their own advantages and disadvantages. As a smart investor, you need to figure out who you really are and how well you can manage all the risks that exist in these types of investments. If you are going through this article from the beginning to the end, you will grab a lot of useful information that you might need in making your investment decision.