Less-Speculative Land Investments
By Steve Gillman
The typical idea people have about land investments is to
buy, hold and someday sell for a big gain. Not a bad plan if
it works, but there are some problems with this strategy. I'll
explain with a true story.
During my brief time as a real estate agent, a woman who had
put all of her money into land for decades started to sell off
those investments. I don't recall the exact numbers, but I recall
one parcel of a few acres she bought for about $30,000 25 years
earlier, and was selling for about $80,000. That might seem good,
until you analyze the rate of return and the rest of the story.
First, she had to pay property taxes for all those years,
which in this high-tax area amounted to about $9,000. Commissions
and for raw land sales were high as well, amounting to about
$8,000 if she got her full asking price. So the best she was
going to do was double her money. Now, considering that with
just a 3% annual return an investment will double in value in
24 years, she did less than 3%. She could have done far better
leaving her money in the bank (during many of those years CDs
paid better than 5%).
Because of the holding and selling costs, land investments
have to go up more than you might think to be good investments.
It's a speculation to buy land, because you're betting on appreciation
that gives you a high enough rate of return to beat bank rates
even after all costs. Is there a safer way to invest in land?
Yes.
There are a couple ways to reduce the risk dramatically. You
might even reduce your holding time, so you can realize those
gains sooner. Here are three strategies to consider, and if you
use all three on the same investment you might do particularly
well.
1. Buy land that has salable resources. I know of people who
have sold thousands of dollars worth of gravel from their two
acres of land. I also know a man who was paid several thousand
dollars by a lumber company for half of the trees on his five
acres, and the land looked the same afterward. Depending on the
resources sold and the primary purposes for which the real estate
is valued, removing resources may not lower the potential sales
price. That five acres, for example, was a residential purchase
and may have looked even nicer when the trees were thinned.
2. Buy land that can be split. Land generally sells for more
per-acre the smaller the parcels, so a $40,000 piece of 20 acres
might get $16,000 for each of the four five-acre lots it could
be split into. You might even split off and sell just one small
piece to lower your total investment.
3. Sell land on payments. I know from experience that small
parcels can be sold for as much as 30% more if you offer the
buyer easy terms. Even a $50,000 investment you paid cash for
(presumably getting a good price), might be salable the next
month for $60,000 if you offer to take $1,000 down and $500 per
month. In addition to the gain you get the interest.
How Much Can You Make?
Every deal is different in land investments, so let's look
at a hypothetical example to get an idea of what's possible.
Suppose you buy 20 half-forested acres in Michigan for $20,000
near a growing small town (yes, this is possible-I just checked).
The part without trees has some rock piles from farming activity
that happened generations before. You contract with a lumber
company to select-cut some of the trees for $4,500, and a landscaping
supplier buys the attractive rocks for $250 (they pick them up).
Local rules allow splits down to five acres, so you split off
the corner piece that fronts two roads and sell it for $7,500.
You have received $12,250 so far, or about $11,000 after expenses.
That brings your total investment down to $9,000 for 15 acres--
obviously this is already looking less risky than the average
land purchase.
Five years later land values are up, and five acre parcels
around your property are selling for $11,000. You split your
property and sell three five-acre pieces without an agent, offering
them for $13,500, with $500 down payment and payments of $210
monthly, at 9% annual interest. The down payments cover the costs
of the survey/split, and it takes seven years for the buyers
to pay off the balance. Principle and interest add up to $52,700
in that time--not a bad return on your $9,000.
Ways to Make More | Related Opportunities
| Tips
Small parcels can be marked up more when offering terms.
Larger parcels are more likely to have salable resources.
Look for trees, rocks, or hay that can be planted and cut. You
might get a quote on the sale of these things prior to making
your offer, to really lower the risk. If you plan to sell more
than seven years out, you could even lease the land to a Christmas
tree grower.
Qualifications / Requirements
This is a strategy that works best if you have the cash to
invest. Although in theory you could get a high enough return
to justify financing a deal with a mortgage on your home, this
adds to the risk.
First Steps
Look at what is for sale, focusing on those land investments
that might have resources to sell, can be split, or are in areas
where real estate is appreciating quickly.
Resources
How To Be A Dirt-Smart Buyer of Country Property, by Curtis
Seltzer - Infinity Publishing 2007
http://www.totalrealestatesolutions.com/realestateforms/index.cfm
- You can download and print some basic forms for free here.
My Real Estate Investing Course - Sign up for free
(the form is somewhere above or to the right).
Real
Estate Development Made Easy - Download it today, and put
the lessons in this ebook to work (and make a commission for
me).
|
