Article Review: A System Approach to Vacant Land Investing

“Buy land, they’re not making it anymore”

-Mark Twain

You may have heard land is a great investment.  The quote above emphasizes this very point. If the human population is increasing and the supply of land remains constant, then the value of land is bound to increase over time due to the law of supply and demand.

Most people think that when they invest in vacant land, they are committing to a long-term investment with the risk of losing money in a down market.  However, land investments can return a profit much quicker than 10, 15, or 20 years, as long as you the investor follow proven basic principles.  For instance, by purchasing land in fast growing areas and applying the principles mentioned later in this article, property will typically appreciate at a steady rate in a short amount of time without much downside risk.

Don’t Get Caught in the Hype…

Many investors identify a solid land investment based upon the buying decisions of the masses. For example, if you receive a flyer advertising land for sale in a given state, you may ask yourself, “Why would I ever invest in that area?” You then receive the same flyer over and over again, unbeknown to you that the prices in this area are consistently going up. A few years later, when someone “trustworthy” gives you a tip on where the next great land investment is located, you finally decide to react.  Thus, based on the suggestions of inexperienced investors, you invest all of your hard earned money in an area that is now overpriced. This is the first mistake of most land investors – they buy on the hype of an area.

Follow a System…

There is a list of key principles that we have gathered over the years that should be applied when considering your next land investment; these principles should be the basis of your investment decision, thus creating a repeatable system approach to investing in vacant land.

The first principle is doing your research to locate the fastest growing areas throughout the country. Our research department at Build Wealth with Land works diligently to find the fastest growing areas throughout the United States. Furthermore, we have found that the best investments are not in just fast growing areas, but resort communities in fast growing areas. We comb the entire country and locate undervalued resort communities, or hidden gems, within the fastest growing areas in the country.

Why resort communities? Think of a resort community as a force of attraction, or a human magnet that attracts people to a given area because of the activities and lifestyle offered.  For example, resort communities are surrounded by many beautiful lakes, rivers, and streams for boating, canoeing, and fishing.  They offer pristine golf courses, picnic pavilions for gatherings, and scenic nature and hiking trails.  Recreational centers are also on site with a myriad of amenities, such as swimming pools, tennis courts, and basketball courts.  Furthermore, resort communities provide an established infrastructure with pre-platted home sites and low taxes and association fees.  Thus, resort communities create a destination for vacationers, retirees, and active families.

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As John D. Rockefeller once said, “The major fortunes in America have been made in land.”

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The next strategy is to stick to less expensive interior lots. Never purchase expensive lots on the lake or golf course within a resort community. There are a number of reasons why this is important.

First, even though living on a lake or golf course may be where most people want to live; these lots are not affordable for the majority of people. Less expensive lots are easier to sell off down the road. Let’s say your $5K doubles to 10K. Selling a 10K lot is much easier than selling a $200K lot, because more people can afford the less expensive lot. If you purchase a piece of vacant land for $100K today, and you plan to sell it when it doubles to $200K, it will be far more difficult to find a buyer at that price than if you purchased a piece of land for $5K and it doubles to $10K. It is quite logical that more people have $10K available to invest in land than $200K.

Second, we found from experience high priced lots have a greater chance of decreasing in value. Less expensive lots, such as those between $5,000 and $20,000 have not seen a huge increase in price over time and are less likely to decline in value in a down market. For instance, a $100K lot may have been driven up falsely by investors during a buying frenzy and could potentially drop in price in a short amount of time. A $5K lot does not have nearly as much false appreciation associated with it, so we have found they rarely decrease in price. This keeps your downside risk to breakeven.  We have also found that less expensive lots appreciate faster than more expensive lots. Typically a $5K lot will double to $10K faster than a $100K lot will double to $200K.

Thus, purchasing vacant land with a high retail value is a more risky investment, because you are putting up more cash, it is harder to sell later on, and all of your money is invested in one lot instead of spread out between many low priced lots.

Always think of your money like an employee – you want your money to be out working for you (appreciation), and then you want it to return (less time on the market) so you can send it out to work again.

Create Headache Free Cash Flow with Vacant Land…

Next, create cash flow from your vacant land. This is a great exit strategy that will help you to significantly build your land portfolio over the course of your investing career. How can this be done? When you have seen an acceptable amount of appreciation in your land and you are comfortable selling it off at the current market value, offer your buyer terms on the purchase of your land. Become the bank and “hold paper” on the lot. By offering terms you will differentiate yourself from those sellers that accept only cash buyers. Your buyer will give you an agreeable amount as a down payment, which could be as low as zero down. Then, you will finance the rest of the amount due at an interest rate as high as 12-13%, which is very good return when you figure in your appreciation. You then take the cash accumulated from the monthly payments to purchase more real estate and continue to grow your portfolio.

Tap into an Unrealized Source of Capital…

Finally, investors are utilizing their IRA accounts to successfully make this system work. Building a mutual fund of land, or diversifying your vacant land portfolio, is a great way to see steady returns in your IRA.  Most people currently invest their IRA in stocks, bonds or mutual funds, while foregoing the benefits of real estate investments. Land not only has less of a downside risk than stocks, but also a greater return than mutual funds, bonds, or cash. While self-directed IRAs are a great vehicle to invest in real estate, they are not often used because many people are erroneously told by their IRA trustees that you cannot use the account to invest in real estate.

Many types of IRAs can be converted to self-directed accounts including: Traditional IRAs, Sep IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA), Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans, and Keogh Plans. The creation of a self-directed IRA enables you to choose from an array of investments, whether it be raw land, single-family homes, condominiums, or commercial real estate. A self-directed IRA is a tool savvy investors use to tap into an unrealized source of capital and take advantage of the IRA tax and asset protection benefits. Only a handful of administrators offer truly- self-directed IRA accounts.

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Stay tuned! We look forward to going into more detail on the topics covered in this article. If you have any questions or comments, please contact:

Michael Poggi

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