This could probably be the most asked question in real estate development.
This question may be asked and has been asked many times from me by some friends and many of my clients. This question, also, is what I try to answer as a real estate developer—- what will I do with my property, or my land? How will I benefit, profit, or make money from it.
It may be that your property is inherited, handed down to you by your parents. It may be that you’ve bought it specifically from excess cash, and as many advised, bought it as an investment; or however you have held possession of your land, you are blessed so much more than burdened.
Your property can have several things on it. One, you can build factories or industrial parks; or two you can build schools or hospitals or institutional buildings; or three you can build homes or residential buildings; four
places of work or offices; or five you can build malls or commercial buildings; or others —- hotels/ resorts / memorial parks, etc.
As you see real estate comes in many forms. It could be that the land is simply empty or it could contain buildings or structures of one or many or mixed forms and uses.
For simplification, let us first consider an empty land. What can you do with your empty land?
I’d say you have five major options. I will enumerate and I’ll discuss each option or alternative course of action, briefly here. We will be tackling or discussing in more detail each one in succeeding posts. Five options! Yes, one has a lot of options; and aside from that there are many factors one has to consider.
First option: sell your property “as it is” right now — raw, undeveloped, without any improvements introduced. You will have not need to spend for it.
Second option: build first, then sell—improved, developed, with improvements introduced. You will need cash or capital for this.
Third option: lease it out “as it is”— raw, undeveloped, without anyimprovements introduced, without spending on it.
Fourth option: build first, then lease it out—improved, developed, with improvements introduced. Same with second option, you have to spend to develop the property.
Fifth and last option hold hold on to your property; let it ripen with age. With very few exceptional cases real estate or land, your property, will appreciate in value through time.
OPTION NO. 1
One thing that that a landowner can do is to sell the land as it is right now. By the way, the assumption we’re making here is that the land is empty for simplification.
The empty land is often called RAW LAND. By dictionary definition, “RAW LAND is land found in its natural state, without man made improvements.” Another way the real estate industry refers to it is it is UNDEVELOPED LAND.
What is to be expected— though I know you will hope for more—- is that your property cannot command a higher price as compared if it were developed.
This option is chosen mostly because the lot owner is in dire need of cash, needs to sell assets or properties, and has no more capital to make any sort of improvement on the raw land.
In some cases, there are niche investors who focus or specialize on the buying and selling of raw land. They may have cash but dedicates them for purchasing of land that are at a relatively low price, rather than spending the money for development.
What is common to the 2 types of empty lot owners is that they’d sell without spending cash for the improvement of the raw land. That is what’s good about this option—-the lot owner will not have to put out cash from the pocket. There will be a few expenses, but they can be sourced from the payments, from the buyer. This is normally the case for selling transactions. The real estate brokers will be paid their professional fees or commissions from the payment of the buyer.
The real estate broker is the person who is duly licensed, meaning he or she has been certified by the government to be knowledgeable and competent in facilitating the sales transactions and managing the sales documentations. The licensed real estate broker has moral obligations and duty-bound to provide the best advise, guidance and servicing; hence, their clients must pay them their dues.
Just a sidenote: in some cases, it is the landowner who pays the fees of the broker. In fewer cases, the broker can help both parties; but that is too complicated, especially in terms of trust in being fully impartial and fair.
There are other costs: taxes, government documentation fees, and the miscellaneous stuff, like transportation, meals, etc.
Going back to an earlier statement— we cannot expect the best possible returns for the property. Bigger returns will require bigger investments, obviously.
When I said it can’t command a higher price, you’d ask, “but how low a price is low?
TAKE NOTE: The value of your property depends
on many factors.
A few of these would be:
How close is it to major destinations, like the work place, the office, the school, the market, etc.? What’s the environment or surroundings like? Is it peaceful, secure and quiet? Busy and burdened by traffic? Is it in a natural disaster-prone area? Does it have a good view? Is it accessible from the public road? Or does it have road frontage? Do public buses, jeepneys, or tricycles traverse the area?
B.) PHYSICAL CHARACTERISTICS
Is it flat or is it rolling? Does it have steep slopes? Is it fertile for farming? Irrigated? Is it prone to flooding or maybe landslides?
C.) SPECIAL CONDITIONS
Are there legal limitations to your property, say: a.) you’re only allowed to have residential buildings and not commercial ones; or it’s just for agriculture or farming; b.) you’re near the airport and can’t build tall buildings; c.) you have used your lot for a loan as collateral. It’s under mortgage.
There are, indeed, so many questions and considerations. It will require several separate blog posts just
to tackle each.
A simple way to sum up those factors is this: if the land could provide the buyer his or her needs and wants, it is beneficial. It is useful.
The higher the benefits or usefulness, the higher is the land value. I just hope you get the idea.
The value of your property depends on many factors, and it is relative. Relative, meaning, it has to compare well with the value of the properties in your vicinity, provided, more or less, there are similarities in the factors discussed earlier.
Build first then sell.
You can build a house or several houses, depending on the size of your lot and on your capital. You can even build a multi-storey building or buildings! You’re not limited to residential products, there are other uses of real estate. You can build an industrial park, with roads, sewerage treatment plant, and other facilities, and sell the lots to manufacturers. You can build residential or even office condominiums for sale. Condotels or condos that are operated as hotels can also be an option. You can also build products not just for the living. You can build and sell columbariums, mausoleums and other memorial products.
The revenue potential is magnified the bigger and the more you build; but so will the capital requirements be. The bigger the investment the bigger, the return.
What if you have some capital for development, but not enough for your bigger plans?
One option is to borrow. Most likely it will cost you some more on
interest charges. These vary depending on the prevailing economic climate, and generally on the risks involved.
Speaking of risks, lending institutions, like banks, should also require some security against the loan. This is in the form of collateral. This is an asset, usually real estate, that is pledged as security for the repayment of loan, to be forfeited in the event of a default. If you fail to pay what you borrowed, the bank takes posession of the collateral.
They call leveraging when using other people’s money or the bank’s money. Key word there is “lever”. Remember your physics lesson on simple machines, how levers multiply the effect of the force, and makes work much easier? It’s the same with financial leveraging. Future lessons will discuss this further.
Your Return on Equity will be much higher, a vital financial metric—-you’ll soon find out.
Another option is to have a Joint Venture partner. You can have a more experienced and better-funded
Developer as a partner to help you build on your lot. Returns to your lot will be based on the developed
value of your property then, higher than if it were raw and undeveloped.
Development, though, takes time. Hence, if you’re on a rush to get paid, this mode isn’t for you. Take note, simplified, the process involves the following: conducting market, financial and engineering studies, planning — architectural, structural engineering, mechanical, electrical,etc., acquiring permits and clearances from
government regulators —- these even before you begin construction per se.
And before selling, there will be marketing activities first. And when finally, the products are being sold,
not many pay the selling price in full cash. Most will pay in installments, hence, you
wait. Waiting isn’t all that bad, though, when you can earn extra on interest. More on this on future lessons.
Don’t sell the land, just lease it out — RAW, UNDEVELOPED, WITHOUT ANY IMPROVEMENTS
This is ideal if you’re not in need of big cash inflows a.s.a.p. Cash will flow in, without you spending on
The lessee or tenant is the one who will have to put out cash or make investments on the construction or setting up of facilities, and even on the upkeep and maintenance of the structures to be built on the land.
The lease rate will be comparably low, as your tenant or lessee will still need to invest heavily on building on your property, before they can themselves generate income from the developed property.
Leases like these are normally long-term, to allow tenants to recover their investments—in building on your property, and making more money off it. 25 year lease terms are common; some shorter, some even longer. The duration is negotiated by the tenant with their investment on it in mind. The bigger their capital in making improvements, the longer time they need to break even, or recover the capital, and to earn profits from it.
Your land’s lease value will depend on where your raw land, how it is physically, what are the needs in your area, and how it compares with other similar properties.
From previous paragraphs, we learned that in selling, the land value is hinged on the benefits, utility or usefulness it provides. The same is true when leasing it out. To get the get the best price for it, you
need to determine what could be the best use for it.
There are many options, let us mention a good sampling here of what tenants could use your for your land.
Lease it out; but build on it first.
This way, you can charge a higher per square meter lease rate, and you can even increase leasable areas. Higher rental rates can be had because you’re no longer offering empty raw land, but developed areas — with walls, floors, roof, and amenities. You can increase leasable floor areas by building above ground, or even below ground.
Leasing out properties generates more or less steady income. Cash inflows are recurring. Wouldn’t that be nice to have a cash cow? Cows do need to be taken cared of, though, else you won’t have milk. Buildings need to be cleaned, secured and maintained. Those need recurring costs too.
The good thing is, you can have your tenants share in those costs. You’ll charge CAMC or CUSA. What they are will be covered in a future lesson on Property Management.
Lease contracts between you, the property owner and the tenant can be for a period of a year or more (or less). You can ask for rents in advance and for deposits. You can also include provisions on rate escalation
or lease rate increases.
Hold on to the property.
Do nothing. That can be the easiest option to do — nothing.
Land ages like fine wine, they say. It’s value should get better with age. Population grows. Demand for land grows with it. Supply diminishes. The Law of Supply and Demand governs.
Yes, eventually your property will appreciate in value. In the meantime, be aware, there are what
we call “carrying costs”. Land owners are required to pay Real Property Taxes annually. If you’re lot is within a managed subdivision, you’d need to pay monthly dues for upkeep. Otherwise, you, yourself will have to do your
For this last option, you’d still make money, but after a long time. This option is for those with other sources
A big advantage of these last 3 options is that you retain ownership of your property. Key Real Estate Lesson: land is finite. Mark Twain:”Buy land, they’re not making it anymore”.
Now, to summarize…
We provided 5 major answers to the commonly
asked question—-what will I do with my land?
You can hold on it; you can lease it; or you
can sell it.
You can lease or sell while it’s in its
raw form, undeveloped and unimproved; or you ease it or sell it after you’ve invested
on the improvements or developments on the land.
In future lessons, we’ll discuss each specific
product type or use in more detail—-for, say: residential, commercial, hotel, industrial, office, etc.
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