Buying Land As A Retirement Investment: What You Need To Know Before Adding Land To Your Retirement Portfolio

Buying Land As A Retirement Investment

When it comes to preparing for retirement, savings, ISAs, and stocks are the common go-to options. In recent years, more Americans owned stocks than ever before. However, another investment is quickly making its way into America’s retirement portfolios: land. Approximately 28 percent of investors believe real estate is the best investment you can make in the long term. For retirees, investing in land for retirement can help them create their own retirement oasis or enter the rental property market, or provide a great source of diversification in their retirement portfolio. However, land as a retirement investment also comes with its own set of drawbacks, strategies, and terms you need to consider before becoming a landowner. 

Residential Properties Are Your Best Bet For Year-Round Income

If you are looking to purchase land to use as a source of rental income, you need to be able to correlate your financial needs in retirement with the income frequency your choice of rental property provides. Land is always seen as a more cost-effective real estate investment for both homeowners and landlords, since it is cheaper than buying an already-built property and provides the opportunity for customization to your retirement goals. When it comes to your retirement goals, if you are looking for a steady stream of year-round rental property income, residential property development is the best bet.  

However, it does come with a longer project time. From securing financing to finding tenants, it is a project that can take years. Therefore, it is recommended that retirees plan and invest in land well before their retirement cut-off to give themselves time to get their property up and running. Only offer personal funds you know you can comfortably forgo for the near future. Moreover, potential investors should also consider costs associated with land development, such as tree removal, in their financial planning. On the other hand, the record low federal interest rates recently announced should act favorably for those seeking a mortgage for land purchases. 

Take Your Time To Sort Out Downpayment And Subsequent Financing

Unless you plan to finance your land purchase outright, it will take time to arrange your financing and finalize the terms. Depending on the value of land in the state chosen, you will also be required to make a downpayment of 10-20 percent of its purchase price. This will deplete your liquid retirement asset (cash) and requires early planning, particularly if you intend on leaving your career before you reach 66 years old. Early retirement means fewer years of annual income from your career and requires consumers to amp up their savings leading up to retirement. Land loans also come with interest rates of between 4 and 6 percent and come with a variety of options, all with their own terms. Before making the leap to apply, be sure you are familiar with them. 

Lender land loans can carry higher interest rates if you have no land development plans in mind, and they often require higher downpayments – sometimes up to 50 percent. Alternatively, you may get seller financing but risk a shorter repayment term. For government-backed financing, there are Section 523 and 524 loans that offer more favorable interest costs, but these only apply if you plan to use the land to build your residence – not an income property. Finally, take the time to ensure your finances can keep up with the repayments during land development. With no income coming in as yet, you will find this will reduce your retirement savings. 

Get Your Tax Obligations Clear Before Buying

Each state has its regulations and taxation rules for those who own land, which you should account for when calculating your overall net benefit. For landlords, this is in addition to legal and maintenance fees paid annually to keep their property. For those choosing to just hold free land in their portfolio for rental or appreciation, they can expect to pay capital gains taxes as well. When deciding where to purchase land, it is wise to check the state’s rules on dates and calculation criteria for your property taxes. For instance, retirees owning land in Nevada may qualify for its exemptions from income taxes (rental income). Meanwhile, other less tax-friendly states for retirees, like Connecticut and Illinois, tend to have higher property taxes. 

That being said, land – like other forms of investment – does not come without its risks. For those with plans to develop a rental property for retirement, scoping out surrounding rental rates and market conditions can help you determine whether it is a worthwhile investment for your portfolio needs and timeline.

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