Rural Land Investment Analysis
Comparing Two Parcels of Rural Land for Investment and Recreation
I wanted to take a break from the markets to talk about another form of investing that does not get a lot of coverage but can be very lucrative, especially during turbulent times such as Covid-19 and general political unrest. It is a form of real estate investing I call rural land investing. I currently have two rural land investments and I am looking to add a third. Rural land is a great inflation hedge, a potential “bug-out” location to protect yourself and family members in the time of emergency, and can also be used as recreation land. It does not require tenants, or maintenance and often can be left alone for years and years while still appreciating in value, often significantly.
On Saturday, I looked at two parcels of land out in Western New Mexico. Both Tracts were 165 acres each. I will compare and contrast the parcels of land and go through my investment and price analysis. One of the most difficult aspects of rural land investing is valuing the land. Value of rural land depends on factors almost too numerous to list, but I will go through each of the most important ones for this analysis. The factors for rural land when considering an investment are: vegetation and terrain, legal factors, location, water, ability to negotiate price and income potential.
For ease of comparison, below is a plot map of the parcels, the ones I analyzed labeled as as parcel 1 and 2. Parcel 1 is shown as a 330 acre parcel, but the owner is willing to sell it as two separate 165 acre pieces. I was only interested in the northern parcel. Parcel #1 was listed for $110,000 for 165 acres and Parcel 2 was listed at $127,000 for 165 acres.
Vegetation and Terrain
When selecting rural land for an investment, you always want to consider the vegetation and terrain. Typically more vegetation creates more value due to the ability of the soil to potentially grow food, plants providing shade, abundance of wildlife and scenery. Terrain is extremely important because the ability to build a home on the land often depends on whether your land is flat or hilly. Flat land generally is more valuable than steep hillside. Additionally, having a nice view is extremely valuable. A great view can draw someone in and have them envisioning building a home or waking up in their tent overlooking beautiful natural scenery.
Parcel 1:
Parcel 2:
Since both parcels are located near each other, the vegetation and terrain were very similar. You can see that the parcels are considered “high dessert”, with Juniper and Pinon trees, scattered throughout a grassy scrub. Both offer abundant shade and both are relatively flat. Parcel 2 however was much more rocky than Parcel 1. This lowers the investment value of Parcel 2 both for difficulty of building and just for general usage of the property. It was very frustrating rolling my ankles on rocks while walking the property perimeter. Parcel 2 had a slightly better views of the surrounding country-side than Parcel 1.
Parcel 2 view of nearby mountain:
Parcel 1 view:
As you can see Parcel 1’s view is much more obstructed than Parcel 2. With some minor landscaping and logging Parcel 1 could have almost as good a view as Parcel 2. In this category, both plot’s of land are neutral with a slight lead going to parcel 2.
Legal Factors
This may be the most important, but also most overlooked factor when it comes to investing in rural land. The value of rural land extends not only from the surface of the land itself but also the land resources and one’s ability to use the land. Depending on your state, the minerals you may mine or pump from the land are completely separate property rights than ownership the land surface. This means you can own a piece of land but someone living 500 miles away can send an oil drill onto your land and drill for minerals. The minerals rights owner has a superior right than surface rights owner. Without owning the mineral rights, a property owner has no right to kick the drillers off your land. Even if you are living there! That is why it is so important to know exactly what rights you are buying. There are mineral rights (oil/ gas, uranium, cobalt, etc.), water rights, timber rights, and surface/ grazing rights. Not only will the owning of these rights allow the property owner to enjoy more potential income from the property, it prevents an absent mineral right owner from destroying the value of your property by drilling for oil without your permission. There is a very rare situation where I would ever purchase a property without the full bundle of rights. I pre-screened these properties and all rights would sell with the land meaning, if I wanted to I could drill for oil, farm, chop down the trees, etc.
The second set of legal issues one needs to consider when buying rural land is covenants and easements. I took two semester long classes on this in law school and could write 100 pages on these topics, but the bottom line is that an easement allows a person to drive through your property and you cannot stop them. Obviously this effects the value of your property because who wants to be out enjoying their nice rural land in the countryside and have trucks and cars driving through the middle of their land! Make sure to check the easements before purchasing rural land!
As you can see on the map, both these properties are the furthest east properties in the division and there are no restrictions or easements. Very Important!
Location and Neighbors
When looking at rural land to invest in, a thorough scan of the neighboring parcels and are is vital. Most rural land purchases will be made by people looking to escape crowds and noise. Whenever looking at a land to purchase always zoom out the map and look what is nearby. Is there large ranches in the area? A noisy construction site across the street? How far is the nearest town? Is there a neighborhood nearby that may tempt locals in the area to “borrow” from something stored on your property? Keep in mind, that in rural areas there is often little or no police and things are stolen often. Both parcel’s 1 and 2 are away from main roads and are bordered by other ranches which would deter access from any trespassers or thieves. However, parcel 2 is a lot closer to a subdivision meaning there is more access and temptation for people to “explore” your land. Parcel 1 is located at the end of a gated road, requiring passage through four ranches on an easement in order to access that parcel, meaning that a would-be trespasser would have to trespass through four ranches without getting caught in order to enter your land. This kind of security and distance is vital when buying rural land for enjoyment or investment.
Trespassers aren’t the only thing to consider when it comes to location, often times your neighbors are most important! Like-minded neighbors are vital. The last thing you want to do is invest in a parcel of land with a neighbor that uses his land for a shooting range or a developer looking to build a subdivision. As part of my research with this property I spoke with a few of the owners and asked them questions about the property. All of them are looking to enjoy peace and quiet in the country and hunt their land one to two weeks per year. None of them expressed any plans to build subdivisions or use the land in a way that would affect the land value of these parcels. An additional bonus to these pieces of land is the eastern border. Here, the eastern edge of both properties backs up against a 90,000 acre ranch. This is amazing when thinking of property values. It is like having a private preserve bordering your property. The odds are this large ranch wont be developed into a subdivision and trespassers from such a large and wealthy landowner is very unlikely. Having such a large ranch on your border provides protection and privacy where other smaller parcels will not. Here, Parcel 1 borders the 90,000 acre ranch on both the northern and eastern sides. Where as parcel 2 only borders the large ranch on the eastern edge. Additionally, Parcel 2 has a house and barn built very close to the northern border and parcel 1 had no buildings anywhere near the border. In terms of neighbors and privacy, Parcel 1 wins out.
Water
Water, the essence of life. Water is immeasurably valuable to land. It allows one to grow vegetation and attracts game, it also provides viability in looking for a place to escape if the world goes to hell. Neither of these properties had running water on them. However, both properties came with water rights, meaning you can drill a well and install a pump and tap the water from underground. Drilling a well definitely improves the value of your property, but it can cost up to $30,000 to drill a well and install a pump. This is definitely a factor to consider in purchasing your property. A well is not required to be placed on a property, however it makes life much better when camping or staying on the land and it increases the value of the property immensely. If there is no water on the property, always make sure water rights are being sold with the land!
Ability to negotiate price
A common saying in real estate is that “money is made at the purchase”. That is probably the most true when it comes to rural land investing. Often times, the listed price for a land parcel and the price you can negotiate vary wildly. Rural land sells at a much slower pace than homes or commercial buildings, which means if a seller is desperate to close a deal, they may accept a low-ball offer in order to move quickly. Additionally, rural land is often owned by out of state owners who purchased the land on a whim and now realize they don’t get out to enjoy it as often as they thought. If you gather some intel on a potential land purchase you can use this information to get the land at the best price. Here, through the realtor, I found out that Parcel 2 has been on the market for over five years! The price was lowered from $199,000 to $127,000 recently. Five years of attempting to sell land and having to pay taxes on land you do not use could make for a very motivated seller. I also learned that on Parcel 1, the landowner is from out of state, has owned the parcel for 4 years and has only been at the parcel twice! This could also be a very motivated seller because they have no emotional attachment to the parcel. This knowledge could open up the doors and allow me to make offers well below the asking price, which will increase my investment return upon re-sale.
Income Potential
The final factor in assessing a rural land investment is the potential for income from the property. There are numerous ways to collect income from a rural land property. You can sell hunting rights or tags, you can lease the land for agriculture, you can do a real estate contract sale, you can use AIRBNB apps with a focus on camping or using an RV, or you can even rent the land for parties and events. The key here is having a diverse way to produce income from the property while also holding the land as it appreciates in value. Property 1 and 2 both hold abundant hunting game in the area, however, the game with the most income potential is Elk. Hunters will pay up to $10,000 just for an Elk Tag in a Trophy Unit, even more if you allow them to hunt your property. Also, if the property is used a potential retreat in a survival situation it makes sense to want to have game on the property for food. On parcel 1, I found a very nice Elk shed. Elk Shed their antlers in the spring and grow new ones back in the summer. Finding an Elk shed is probably the best sign that trophy Elk are abundant and frequent the parcel besides actually seeing one on the property. Having confirmation that trophy Elk are on this parcel weighs heavily in favor of parcel 1.
The analysis and decision
Parcel 1 is definitely the better investment choice for rural land between these two parcels. Parcel 1 has evidence of Trophy Elk, is at the end of the road which offers more security and better privacy, is bordered on two sides by a 90,00 acre ranch, has great neighbors and is cheaper. Additionally, the owner is out of state and is likely a motivated seller. The asking price on Parcel 1 is $110k. Considering all the factors, including having to drill a well, I feel comfortable with making an offer of $85k and would be willing to purchase the property for any price under $100k.