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How does owning land “hedge” against inflation?

in General

 

Commercial land for sale

Considering that we’ve all watched inflation spiral upwards during the first half of 2022, you may be looking for an investment that will protect you against it.

One proven strategy: find and purchase commercial land for sale

Before we investigate how land can be an effective hedge against inflation, let’s look at some of the factors that have caused our current woes.

Factors That May Cause Inflation

Inflation can appear complex, as almost every period of inflation is caused by its own unique combination of factors. 

However, the basic cause for inflation is when imbalances in supply and demand result in higher prices

Here’s what’s been going on since mid-2021:

  • Wages have increased due to some of the lowest unemployment figures in 50 years. For this reason, many employers were forced to increase the prices of their products and services.
  • Fuel prices rose because of sanctions protesting Russia’s invasion of Ukraine. Together with some OPEC members limiting production, this resulted in global fuel shortages. 
  • While consumers minimized spending during 2020-2021, the easing of travel restrictions resulted in many Americans deciding to “shop till they drop.” 
  • Supply chain problems caused by COVID are still affecting the retail markets, causing shortages that drive up the prices of these products. This is a capitalist economy’s classic “supply vs. demand” factor.

While the Federal Reserve has taken steps to slow inflation, some investors are looking for alternatives to stocks and bonds, like commercial land ownership.

Why Commercial Land Buys Are Popular with Savvy Investors

Real estate has been praised as a solid, long-term investment by millionaire investors and even some presidents. 

Here’s what Teddy Roosevelt had to say about it:

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent.”

There are several reasons why Roosevelt made this statement. Let’s take a look.

How Commercial Land Ownership Can Beat Inflation

Unlock many stock market investors, owners of commercial land usually don’t stress over the value of their investment. 

Here are some reasons why:

  • As the price of their land rises over time, it will lower the Loan-to-Value (LTV) of any fixed-rate mortgage debt used to purchase the land, while the mortgage payments’ principal and interest remain the same. 
  • As a result, the landowner’s equity — the amount repaid on the financing, plus the increased value of the land — increases. 
  • The landowner doesn’t have to worry about a sudden stock market dive, as land is a long-term investment. 
  • The landowner can increase the land’s value with commercial buildings, then collect rents. This will also increase the overall value of the investment when it’s time to sell.

If you’re ready to begin shopping for commercial land for sale, here’s where to begin.

Locating Commercial Land for Sale

Unless a potential buyer has plenty of time to search through land listings and is an experienced negotiator, a real estate agent or broker specializing in commercial land is a smart choice.

Buying vacant, undeveloped land near an existing commercial development may help to increase its future value.

Picture of building

Photo by Unsplash

Why buy with an agent or broker?

Almost all commercial real estate (CRE) agents (and every broker) have invested time and money to obtain a state real estate license.

  • In addition, most CRE agents have a college degree in business, finance, or a similar major. This is because commercial land is often more complex than residential homes.
  • CRE agents are highly trained. This means that you can rely on your agent to explain capitalization rates, internal rates of return, and related topics. 
  • CRE agents can often assist you with locating the ideal lender. 
  • Perhaps most important, a CRE can negotiate the best possible purchase agreement. This is when a smart CRE earns his or her commission. 

Working with a commercial real estate agent to locate commercial land can help you achieve your investment goals with minimal stress.

Man and woman at work in buidling

Photo by Unsplash

If you plan to obtain financing for your commercial land purchase, locating the right lender is the best next step. But before you do this, you’ll need to decide what type of commercial land best suits your plans and budget.

Types of Commercial Land

You will need to be specific about your need for a land-only loan and which type of land you plan to purchase. 

This is because lenders follow different guidelines for each type. 

  • Undeveloped land can be classified as either raw, unimproved, or improved. 
  • Raw land does not include utilities such as water, electricity, or sewers. 
  • Unimproved land may provide access to some but not all necessary utilities.
  • Improved land includes access to roads and all utilities.

For example, loans for undeveloped land may have slightly stricter qualification guidelines, such as:

  • Higher down payments of up to 50%;
  • Higher credit scores of 700 or more;
  • Higher interest rates;
  • Shorter terms of five years or less.

While you may be content to make the repayments on your land as you watch your equity levels rise, you may decide to put the land to work for you as well. 

Here are some ways you can do this.

Build on Your Land and Pump Up Your Volume

Commercial land investors can earn additional income with the following.

Building a multi-family property. A two-to-four-unit building or apartment complex can give you a secondary hedge against inflation.

  • As inflation rises, rental rates can be adjusted upwards. Meanwhile, your mortgage will see minimal change, especially if it’s a fixed-rate loan.
  • While there may be costs involved with managing tenants, these generally outweigh the monetary benefits of collecting monthly rents. 

Building a retail property is another option. 

  • While these tenants will require more management than residential rentals, you will have the option to negotiate a longer lease.
  • Since most commercial real estate leases are “triple net”, or NNN, this means the tenant will pay many property-related expenses, including utility bills and maintenance fees.
  • As utility and maintenance fees rise with inflation, you (as a combination landlord/owner) will be insulated from the effects on the property’s cash flow.

Commercial Land as a Hedge Against Inflation

Commercial land real estate can be a smart, lasting hedge against inflation. Long-term property values tend to stay on a steady upward curve, even if an economic event causes values to fall temporarily. 

Commercial real estate investments can also provide additional income for investors who build on their land. 

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