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Investing in land can be a tricky task, as there are often unique characteristics and situations for each property. Compared to many other real estate investments, the land is hard to compare with different properties. Therefore, investors need to perform thorough due diligence on their land properties before beginning their development projects. There are several methods that investors and developers should use when valuing land for new development. Each of these methods belongs to the overall land residual method, which ultimately provides the residual value of a piece of land by subtracting development costs from the expected value that the land will provide.

Land Usage and Location

When an investor comes across a property that they would potentially like to invest in, they need first to figure out how they will use the property. Determining the property usage will allow the investor to understand how the property will produce revenue. When valuing land, an investor should determine the best use for the property and the method that will allow the property to make the most money.

Location can play a major role in how much a piece of land is worth. Land that is available in a thriving urban environment, for example, is usually worth much more than land that is in a small town with a small population. This is all due to how the land can be used to make money and its expected growth in value over time.

Development Costs

Development costs vary based on several different factors, like location and chosen materials. When investing in land, an investor should determine their development costs before purchasing the land. These costs can be estimated by contacting local developers, researching material costs, and talking to other investors in the area.

Determining Profit Margins

An investor needs to determine the profit margins they would like to work within as they value a land property for development. Determining these profit margins will provide insight to the investor on how much a piece of land will need to make and how much they will spend to complete their development.