The Cost of Carry – How it Relates to Raw Land
The cost of carry related to raw land refers to the ongoing expenses associated with holding a parcel of land over time. These costs are incurred regardless of whether the land is being actively developed or used. The cost of carry is important for landowners, developers, or investors to consider when evaluating the financial implications of holding land over an extended period.
- Property Taxes: Local governments often charge property taxes on land ownership. These taxes are typically a significant ongoing cost that landowners must factor in when calculating the cost of carrying raw land.
- Insurance: Landowners may need to purchase insurance, such as liability insurance or property insurance, to protect against risks like damage to the land or potential legal issues (e.g., trespassing or environmental hazards).
- Maintenance Costs: Although raw land may not require as much upkeep as developed property, there are still potential maintenance costs. For example, clearing brush, maintaining access roads, fencing, or managing vegetation may be necessary to keep the land in good condition.
- Opportunity Costs: This refers to the potential returns that are foregone by not using the capital tied up in the land for other investments. The opportunity cost is harder to quantify but still an important factor when considering the long-term holding of land.
- Utilities and Services: Depending on the location and zoning, there may be costs associated with basic services or utilities, even for raw land. For instance, paying for septic tanks, water rights, or land surveys may be required in some cases.
- Legal and Administrative Costs: Legal fees, title insurance, and other administrative costs related to land ownership and any development planning can contribute to the cost of carry.
When evaluating the cost of carry, investors need to weigh these ongoing costs against the potential return from holding or selling the land, as well as the possibility of developing the land in the future. High carrying costs can reduce the profitability of holding raw land over time, especially if the land is not generating income or appreciation.
The information in this post was compiled by S. Zachary Fineberg, CFP(r) Managing Member of Fineberg Wealth Management, LLC, a registered investment advisor. If you would like to schedule a consultation to discuss how Fineberg Wealth Management can help you reach your long-term financial goals, please make contact to discuss.
