Freedom to find the best use
One of the biggest benefits of choosing a vacant land loan for your financing is you have the option of choosing the best use for the property and shaping the land however you see fit.
The caveat is that you may be limited by existing zoning restrictions. if you decide to go this route, do your homework and talk to someone on the local zoning board and planning commission to see if your vision can become a reality.
More affordable than developed land
As stated above, undeveloped land is generally considered more affordable than developed land. Getting a piece of undeveloped land in an up-and-coming area can be a good investment strategy. However, a land loan usually only represents part of your total cost. Generally, investors will also have a construction loan to worry about after they purchase the land itself.
Cons of land loans
Those points aside, there are also some disadvantages to getting a land loan over a construction loan. Be sure to consider these carefully to know what you’re getting into if you do end up pursuing this type of financing.
You may face stricter qualifying requirements
Since land loans are often thought to be riskier by lenders, they also come with stricter qualifying requirements. You likely need to have a good or excellent credit score, and you should be prepared to put down a larger-than-normal down payment. Additionally, you may be subject to a higher interest rate.
The tax benefits are limited
Unfortunately, the tax benefits of buying land are limited. While you may be able to depreciate certain improvements, such as roads or a sewer system, you won’t be able to take a mortgage interest deduction until you’ve built a structure on the land and construction is complete.
No immediate cash flow
As an investor, there’s not going to be any immediate cash flow with this property. In fact, you have to build your structure on the lot before you see any substantial income from your investment. In the meantime, you also have to worry about paying property taxes, as well as financing the improvement costs.
How to get a land loan
Finally, now that you’re familiar with the advantages and disadvantages of getting a land loan, learn how to get a land loan as an investor. While land loans are often trickier to procure than traditional mortgages, it’s not impossible. To that end, below are four options for securing financing.
Consider owner financing
In an owner financing scenario, instead of getting financing from an institutional bank or lender, you’ll make a financing agreement directly with the seller. Over time, you’ll make payments to the seller in exchange for equity.
That said, this type of arrangement may be more difficult to find. Many sellers aren’t interested in acting as a bank or having to sell a mortgage note on the secondary market to receive a payoff.
When you’re looking for a land loan, choose a lender who specializes in land financing. For that, you may want to go to a local bank or credit union in the area where you intend to buy. Often, local institutions will be more experienced with land transactions, and they may also offer more flexible terms for loan approval than a national institution.
Get a USDA loan
If you’re planning on buying rural land and want to develop multifamily housing available to low-income individuals, you may be eligible for a USDA loan. These loans often offer a competitive interest rate, as well as a 30-year loan term, uncommon with land loans.