The Risks and Dangers of Land Hacking: What You Need to Know
Note that the information provided herein should not be considered financial advice. I am not an accountant, and recommend seeking professional guidance specific to your personal circumstances.
Disclosure: This post may contain affiliate links, which means if you click on a link and make a purchase, I may receive a small commission at no extra cost to you.
Land hacking (the process by which you generate multiple income sources from one parcel of land) can be an incredible real estate investment strategy and can even help you replace the income from your full-time job. If you’re like me, you have dreams of financial freedom. With so many ways to monetize one piece of land, it feels like it could be the silver bullet to help you reach your financial dreams. Of course, it does come with a few downsides - and some of them might be deal breakers for you.
The truth is that land hacking is not a silver bullet. The strategies might be simple, but it is hard work and comes with their own set of unique challenges. Land hacking and land development opportunities are difficult to finance, carry a burden of meeting stringent zoning and municipality requirements, and the costs of development can be prohibitive.
If you can overcome these challenges, you might just have an incredible opportunity in front of you. In this post, I’ll dive deep into each and provide you with some potential solutions to overcoming them.
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Land hacks are tricky to finance
Unfortunately for us aspiring land hackers, land development is seen by financial institutions and banks as a high-risk endeavor. Amongst many concerns, banks have to consider that:
There is no guarantee of success or profitability;
Bare land is not as liquid as traditional real estate and therefore more challenging to sell if you default;
Development projects often take years, not months which increases the risk that the project will not be completed on time, on budget, or at all;
Future value is very difficult to determine, and banks, therefore, do not have a point of reference to base lending on;
Land development processes are complex and require specific expertise to do properly and avoid risks.
For those reasons and more, many banks simply won’t lend on land. Others may require much higher down payments in the range of 40-50% of the purchase price. Unfortunately for many, this leaves little left for your development expenses.
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How to mitigate financing challenges
There are a few strategies that you might be able to take to help get around the financing concerns, including:
Locate and purchase land that already has an existing home or structure on the property. If you do, you may be able to lower the down payment requirements significantly.
Work with a seller to arrange seller financing through an instrument called a Vendor Take Back (VTB) mortgage. A VTB can be an excellent tool to help complete a transaction for a property that is harder to sell traditionally and can allow for lower down payment requirements and more.
Try thinking “tiny”. If you can secure a parcel of land, you can start small with less permanent structures such as tiny a-frames, glamp tents, and domes, or even something as simple as off-grid camping. All of these options will allow you to grow your land hack with less capital required to fund the build of physical structures.
As a final option, you may have more luck purchasing land outright, and then applying for a construction loan to perform your development afterward. You will likely still typically have to fund a large portion of the development yourself, however, if you do have the cash it may be a great option for you.
Zoning and land use regulations will challenge you
In real estate investing, there is an adage that you make money when you buy. This is especially true for land hacks and developments. In addition to purchasing for a good price, you must also very carefully consider what the local regulations allow to be developed on a specific parcel of land. If you are looking to build a campsite, ensure that campsites are specifically stated in the list of allowable land uses for that parcel. Similarly, it is important to validate how many structures can be built on a parcel, and what size they can be. Even if you do not plan on building permanent structures, temporary structures and even trailer parking may be restricted. In any case, before you invest, know your zoning and land use regulations!
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Once you’ve determined that you are allowed to use your land for what you had hoped, you may find additional challenges to grapple with. The development permit approval process may be lengthy and may require local government input, and even the opportunity for community members to voice any concerns. If any groups along the way are opposed to certain types of developments, you may find difficulties in getting your proposed project approved. All of these steps take additional time, and each of them introduces the risk that your plans may need to be amended or changed altogether.
Lastly, local planning departments may not be familiar with what you are trying to do. Unconventional uses of land may not fit into the very strict box that the bylaws are intended to regulate. For that reason, you may not be able to be as innovative with your project as you might like.
To help you manage these challenges, your best approach is to study the local bylaws in detail and use the specific language that they are familiar with. If there is a provision for cabins or a guest ranch, use those words specifically and do not call your development a “tiny house village”. If you study the definitions of the zoning bylaws and speak in their language, your application will be much more smooth. Also, well before you make an application, call the planning office and talk to them. Tell them what you are thinking, and ask them for their advice. They are smart people and may have suggestions on how you might be able to move forward with a few tweaks to your idea, which could make a world of difference. In any case, regulations can be the roadblock or the very tool that makes your land hack a success - so get to know them in your area!
Everything, yes everything, will be expensive
Cost Concern #1: Infrastructure
Unfortunately for aspiring land hackers, the development costs can also be very high. Firstly, the costs of infrastructure can be significant. Infrastructure can include road development power supply and power lines, communication network lines, water supply, rainwater management, and waste management. It is not uncommon for a development to require over $100,000 of investment before you even begin building a physical structure. To help mitigate some of these expenses, many land hackers start with “off-grid” facilities and offer a unique experience without the modern luxuries that a person might come to expect in a more urban environment.
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Cost Concern #2: Regulation compliance
As mentioned above, the cost of complying with regulations can also be costly. Municipalities may require that you meet a number of requirements, including air and water quality, habitat or wetland protections, energy-efficient building codes, and accessibility. In addition, municipalities may request that you pay impact fees, which mitigate the costs associated with providing services to residents. To limit the impact of these factors on your budget, it is best to ensure that your development project fits into a standard template that the municipality is familiar with. The further your project is from what they know, the more additional requirements you can expect to be added.
Cost Concern #3: Construction in remote areas
Lastly and perhaps most obviously, construction costs will be higher than if you were building in an urban center. The cost of labour will be higher as your resources will be working remotely, sometimes without traditional facilities such as power or water on-site. Transportation and delivery of materials will likely also be higher, made especially challenging if you do not have proper access roads available. In some cases, local suppliers may not deliver to your location at all, which will introduce additional challenges and (usually) extra costs. All of these factors add to additional costs that you will have to be sure to budget for.
Land hacks can be tough, but can still be totally worth it
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Land hacking has skyrocketed in popularity over the last several years, and it can be rather alluring to want to get in on it. Smart developers have flooded the web with instagramable images featuring quaint lighting, minimal living, and modern design all held within the natural beauty of nature. However, land hacking is not without its risks and challenges. As we’ve discussed already, land can be extremely challenging to finance, requires you to work within regulations that likely never contemplated what you’d like to do, and is an exceedingly expensive proposition. However, with every obstacle, there is a solution. You can utilize creative financing to purchase your land, work with municipalities to bring your vision to life, and find creative ways to save on the construction process. If you do manage to overcome these challenges, the result can be exceptionally rewarding.
What about you? Are the challenges of land hacking enough to scare you away? Personally, I am ready to take them on. I’d love to hear your opinions in the comments!