A covered land play is a real estate investment strategy that centers on the future value potential of a property, even while it is currently in use. Although it may sound complex, this concept is easier to grasp with an understanding of how it works.
Defining a Covered Land Play
A covered land play refers to an investment in a property that is not being utilized to its maximum potential or “highest and best use.” While the current use of the property may generate enough income to cover its associated expenses, the real opportunity lies in its future redevelopment potential. Essentially, the property’s income covers the costs until it can be redeveloped for a more profitable use.
Common Examples of Covered Land Play
- Redevelopment: This involves demolishing an existing structure to replace it with a more profitable development, like transforming a single-story building into a high-rise complex, thus increasing revenue.
- Mixed-Use Development: This strategy often involves converting properties, such as industrial spaces, into multi-purpose developments combining residential and retail use.
- Office Park Conversions: Old buildings, like industrial warehouses or shopping malls, are repurposed into office parks or mixed-use properties, boosting the site’s value.
Other examples include urban density improvements or converting vacant properties like parking lots into income-generating assets.
Pros and Cons of a Covered Land Play
Pros:
- High Profit Potential: Investors can earn significantly more if the property is successfully redeveloped for a higher use.
- Easier Financing: Properties generating income can attract lenders more easily, making the investment less risky.
Cons:
- Overpayment Risk: Paying too much for a property without accurately assessing its potential can undermine profitability.
- Income Dependency: If the current tenant leaves, the income stream that supports the property could vanish, adding financial strain.
Who Should Consider a Covered Land Play?
Investors with experience in real estate redevelopment, as well as a deep understanding of local market conditions, may find covered land plays an attractive option. However, the success of such investments requires careful planning, thorough research, and enough time to manage the entire redevelopment process.
Conclusion
A covered land play offers investors the chance to unlock greater value from a property by improving or redeveloping it. While the current income covers costs, the long-term potential lies in transforming the property to meet market demand. However, these investments require careful analysis to ensure the redevelopment will indeed boost the property’s value.