Investing in Buildable Land in U.S. Cities: Why It's a Smart Move—and When It’s Not
Introduction:
As real estate investors increasingly explore opportunities to diversify their portfolios, one often overlooked asset class stands out: buildable land. Unlike commercial properties or single-family homes, investing in raw, developable land can offer significant long-term gains—especially in markets where supply is limited. However, there are nuances to this strategy, and it's essential to understand both the opportunities and risks before making a commitment.
The Case for Investing in Buildable Land
California has been at the forefront of legislative efforts to address the state's housing affordability and availability crisis, with over 100 pieces of legislation passed since 2017. Among these, laws legalizing the building of accessory dwelling units (ADUs) and duplexes in residential areas previously reserved for single-family homes have garnered significant attention. However, these laws represent only one facet of a comprehensive approach. California has also enacted measures to streamline housing production targets and enhance enforcement mechanisms.
LIMITED SUPPLY = INCREASED DEMAND
In certain U.S. cities, land is at a premium due to either natural land restrictions or strict zoning regulations. Markets like California State and or Las Vegas exemplify this scarcity. In these cities, there are few options for expansion due to geographical barriers (deserts, mountains, coastlines) or legal restrictions that prevent rezoning or higher-density development. When land is scarce, it becomes more valuable over time, creating a strong case for long-term investment.
California Example: In cities like San Francisco or Los Angeles, stringent zoning laws and environmental regulations have made it exceedingly difficult to increase the housing supply. As a result, the limited land available for development has driven up real estate prices, making land ownership particularly lucrative.
Las Vegas Example: The geography of Las Vegas is bounded by desert, and land controlled by the federal government severely limits the amount of property available for private development. As the population grows, the demand for housing and commercial space will continue to push prices up for the remaining buildable land.
2. LAND IS LONG TERM ASSET
Unlike structures, land does not depreciate. It can be held indefinitely, allowing investors to wait for the right moment to sell, develop, or lease. The longer you hold onto land in cities with limited supply and growing demand, the more valuable it becomes. As urban areas expand and infrastructure develops, the value of your land increases without the need for significant upkeep or renovations.
3. FLEXIBLE DEVELOPMENT OPPORTUNITIES
Purchasing buildable land gives investors a blank slate to design and build as they see fit. Whether you plan to construct residential units, commercial spaces, or mixed-use developments, owning land offers flexibility that can be shaped to the needs of the market. In cities where regulations allow for development, having control over a parcel of land gives you the ability to capitalize on trends in housing or commercial space.
4. TAX ADVANTAGES
Holding raw land can also offer tax benefits. Land investors may qualify for property tax deductions and can defer capital gains taxes by reinvesting proceeds into new real estate ventures, such as through a 1031 exchange.
THE DOWNSIDES TO INVESTING IN BUILDABLE LAND
1. REGULATORY HURDLES AND ZONING RESTRICTIONS
In cities like San Francisco, restrictive zoning and environmental laws can be double-edged swords. While they protect the value of existing properties, they can also make it incredibly difficult to develop new projects. For investors, these regulations can lead to costly delays or the complete inability to build on their land.
Case in Point: Many investors have found themselves mired in red tape, spending years trying to secure the necessary permits to build, only to see the cost of their project balloon due to legal challenges, community opposition, or evolving environmental regulations.
2. UPFRONT COST AND HOLDING EXPENSES
While land itself doesn’t depreciate, owning buildable land does come with some costs. Depending on the location, you may be responsible for property taxes, insurance, and maintenance expenses like fencing or security. Additionally, land may require significant infrastructure investments, including utilities, road access, and drainage systems, which can drive up your total costs before a single building is constructed.
3. MARKET TIMING AND LIQUIDITY ISSUES
Land investment is generally a long-term play. While you wait for the right time to develop or sell, you may find that your capital is tied up with no immediate return. Additionally, land can be less liquid than other types of real estate assets. In a slow market or during an economic downturn, selling raw land can be more challenging than unloading developed properties.
4. ECONOMIC AND POLITICAL RISKS
Like any investment, owning land comes with some level of risk. Economic downturns, changes in local government, or shifts in demand can impact your land’s value. Cities that once looked promising for development may lose their appeal due to political changes or economic decline, making it crucial to stay informed about market conditions and governmental policies in the areas where you invest.
When to Invest—and When Not To
Ideal Investment Locations:
Cities with Limited Land Availability: Focus on markets like San Francisco, Los Angeles, and Las Vegas where the combination of geographical and regulatory constraints ensures that land will remain scarce.
Growing Cities with Expanding Infrastructure: Locations with infrastructure expansion plans (e.g., new transit lines, schools, or business districts) can dramatically increase land value as urban sprawl progresses.
Land Under Threat of Rezoning: In some cities, zoning laws may be on the brink of change. If you can purchase land before a rezoning effort takes effect, you may see a dramatic increase in value once restrictions are lifted.
When to Avoid:
Oversaturated Markets: Avoid cities where there is plenty of available land and few restrictions on development, as this can suppress future price growth.
Markets with Declining Demand: Keep an eye on demographic and economic trends. If a city’s population is shrinking or its economy is struggling, land may not appreciate at the rate you expect.
Extremely Complex Zoning Laws: In cities with extremely stringent regulations, such as New York City or parts of San Francisco, the cost of compliance can outweigh the potential profit. Look for areas where zoning laws are in your favor, not working against you.
Final Thoughts
Investing in buildable land can be a powerful way to build wealth—especially in cities with limited supply. The key is understanding the dynamics of the market and carefully choosing your locations. By focusing on cities where land is scarce and demand is strong, you can position yourself for significant long-term gains. However, always weigh the risks, including regulatory hurdles, holding costs, and economic factors, to ensure your investment aligns with your goals.