If you are thinking of investing in real estate, one of the most fundamental questions you will confront this early in your investing career is whether you should invest in rental properties or in land. The differences between these two ways of investing in real estate are huge. Pay close attention to their descriptions below so you can cross reference them with your own financial goals.
Not everyone prefers to be a landlord. Nor do they have the competence and temperament to be successful at it. Not everyone has the patience to be a landowner either. You have to pick the right path but you have to know yourself first so you can make the right decision.
Active management versus passive management
Investing in vacant land is easy. How can it not be? You buy land and wait. After a few years when land prices have gone up, you sell. Nice and easy, no? Well, not so fast. Not all areas appreciate at the same rate. In fact, some areas barely appreciate and when you factor in inflation, you might discover you actually lost money.
Rental income properties, on the other hand, require more legwork on your part. You have to actively find renters. You have to make sure the renters are happy. You have to keep your property in good shape. These take effort and they take money. It costs money to maintain rental property. With that said, you do get cash flow from your properties. They also tend to appreciate faster than many vacant lots.
Dealing with people
When you are investing in vacant lots, you only deal with people at certain periods: when you buy and when you sell. When you are investing in rental properties, you have to constantly deal with your tenants and service providers for your rental property. In fact, you will have to constantly put out fires, so to speak since there are so many things that can pop up. The good news is that all this activity is rewarded by the rental property since there is a steady stream of income coming in.
Easier to scale
Another key consideration to keep in mind when trying to decide between investing in income properties and vacant land is: how easy is to scale your investment? In other words, how much collateral can you get so you can invest in more properties so you can scale up your empire.
The truth is that vacant lands can be used as collateral too but they aren’t as ‘sexy’ as rental properties on the whole Rental properties have both land value and income value. This makes for a very powerful combination.