Building a Home : Is a Building Lot a Sound Investment?
As prices drop for products its only natural that buyers want to take advantage of the perceived discount. The drop in real estate values has certainly been a motivating factor in some buying decisions. The mark down has influenced some to step into the market to purchase finished lots. This lot buying activity should provide a reason to pause and ask the question; is buying a building lot a sound investment?
Financial investments have a variety of goals; growth, income, tax shields, dividends in addition to risk factors and time horizons. Everyone has different investment goals and risk tolerances but understanding the factors that impact the purchase, ownership and sale of land is important for making an educated financial decision.
Several investors we surveyed consider only two numbers when evaluating the performance of a real estate acquisition and sale. The investor focuses on how much they paid for the property and their sale price when they exit the investment. Unfortunately this concentration on only the acquisition and disposition costs leaves out so many expenses that it provides an inaccurate view of the investment. It is particularly important for the owner to have an accurate accounting of their total investment, including all of the expenses of ownership, before they make the decision to buy or sell an investment property.
In addition to the initial purchase price of the lot the investor needs to consider both the one time and recurring costs associated with the investment. To evaluate the investment the owner needs to consider closing costs, maintenance, taxes, loan interest, capital improvements, association dues and assessments and selling expenses including commissions.
We have created several models for our own investments and the real estate situation of others to assist in the strategic analysis of land and lot holdings. You may be surprised to learn what we have discovered. Let us know if you are interested.
Michael Stein, The Gentleman Builder, is a home building and remodeling expert located in Bonita Springs, Florida. Michael has over twenty-seven years experience in the home building and real estate development business and has built thousands of home throughout the United States.