Land is the highest-risk real-estate asset class
No tenants, no rent, no depreciation tax shield — and yet you still pay taxes, insurance, and interest every month. Land returns are binary: it either appreciates faster than your carrying cost, or it doesn't. Underwrite conservatively and never use leverage you can't carry through a 24-month slowdown.
- • Land doesn't cashflow — model the worst-case 'hold for 3 extra years' scenario.
- • Zoning and entitlement changes can 10x or zero-out value overnight.
- • International land adds currency, title, and political risk on top of market risk.
Entitlement is the real alpha
Buying raw land and rezoning to residential, commercial, or mixed-use is where institutional land returns come from. The math here models flat appreciation — entitlement plays can compress 5+ years of appreciation into one approval. They also require local political relationships, capital, and patience.
Carrying cost discipline
Property tax, insurance (if any), HOA / road dues, brush clearing, and loan interest all eat into IRR. A $50/mo HOA on a $50k lot is 1.2%/yr drag — material when you're underwriting 5% appreciation. Always own land free-and-clear if your appreciation thesis is under 5%.
FAQ
What's a realistic appreciation rate for raw land?
Long-run US rural land averages 3–5% annual appreciation. Path-of-progress and entitled land can run 8–15%. Flat farmland in a slow-growth county may underperform inflation. Always use your county's 10-year sales-price trend, not gut feel.
Why is the loan rate so high?
Land loans are riskier than mortgages — no cashflow, no collateral value beyond the land itself. Banks usually charge prime + 2–4%, require 30–50% down, and amortize over 10–20 years. Owner financing is common and often cheaper.
Does this work for international land?
Yes — set the loan rate to 0% if you're paying cash (most foreign land is bought cash) and add your local property tax. The IRR math is currency-agnostic; just be consistent.
Should I include income from leasing the land?
If the land generates ag, hunting, billboard, or cell-tower lease income, treat it like a small NOI offset to carrying cost. Drop that into the property tax line as a negative number for now (we'll add a dedicated field later).
What about subdividing?
Subdivision can multiply value but requires entitlement, surveying, road / utility installation, and 12–36 months of patience. Model it as a separate scenario with a higher 'appreciation' input and a shorter hold.