Apr 18

Apr 18 Is Land a Good Investment?

Should I invest in land?

There have been fortunes made in land, but I believe that any potential investor needs to understand some of the risks that go with the potential opportunities. That’s because there have been fortunes lost in land as well. Like all things “real estate”, acquisition of land requires a clear purpose and an ultimate goal. Without that, an investor would be operating on pure speculation, a potentially dangerous situation.

Opinions on land as an investment:

I almost never read other blogs on land development, but before sitting down I decided to look at what other folks are saying about land as an investment. I was disappointed in many of the articles because they were overly optimistic and far too simplistic, in my opinion. Too much “rah rah” and not enough substance. Beware when you hear about big money and fast results….

I believe that investing in land requires a certain capability and viewpoint. It generally does not produce steady income and costly improvements typically need to be made to increase market value. There are no meaningful tax benefits like depreciation that might be realized with, say, a residential rental unit. In short, making money in land requires a mindset of delayed gratification in many cases.

What are ways that might make sense?

If development of the land is the goal, put on your seatbelt. This is a time consuming, costly and risky proposition. Most of my blog is dedicated to this subject and the specific articles are available via my home page. You are free to browse!
Appreciation over time: If an investor makes a solid acquisition choice, then just sits back and patiently waits, time can be on your side. This investor is banking on the historical increase in market value typical in real property and a continued growth in market demand realized by having made a good acquisition choice. The right land pick can make all the difference in the world, as can the wrong one.
I like this idea for the person with wealth that has a well diversified portfolio, along with consistent income from other sources or assets, necessary to avoid a rush to sell the land investment before the time is right.
I do not like this idea for a speculator that is counting on a monster payout at some pre-determined point in time. In other words, the guy that really needs it to happen or he is going to be in trouble. When I think of the appreciation strategy working well, I always picture commercial or multifamily land, but in the interest of full disclosure, I have never done it myself.
Suggestion:
CCIM’s can be a great resource in the commercial sector:
CCIM Institute: https://www.ccim.com/about-ccim/what-is-a-ccim/
Recapturing cost basis: Cost basis is what you have into the land. You bought a piece for $100k which becomes your initial cost basis. As you spend to improve the land, your cost basis rises accordingly. I have told this story before and it’s worth re-telling: I worked for a guy that had about $1 million in cost basis in a parcel (what he bought it for). Before closing he had a certified forester timber cruise the land. Right after closing he filed a Conversion Option Forestry Permit to log the land and got permitted after a few months. He logged the land and from stumpage sales, recovered all of his cost basis - ($1 million from the timber sales). At that point, he was basically sitting on the land for free. Note: Some logging operations result in moratoriums or conversion problems. A qualified attorney and Certified Forester are essential for this situation.
For additional on the land and it’s natural & artificial improvements of value see: The Difference Between Real Estate and Real Property: The Difference Between Real Estate and Real Property — Land Development Realities .
Assemblage: Assemblage in real estate is when you combine two or more adjoining parcels to create a larger tract that has a greater value than the individual ones.
Think of this simplified illustration: The underlying zoning designation is one dwelling unit per 2.5 acres. You want to buy your friends 5 acre lot so you can divide it and he’ll give you a fair price. There is an adjacent 10 acres owned by someone else next to your friend. If you can negotiate and close on both contiguous pieces you now have 15 total acres through assemblage. At 2.5 acre residential zoning, your subdividing efforts could theoretically produce a total of 6 residential lots, a potentially better outcome than getting just 2 lots from your friend’s piece.
Flipping land: True flipping is when you close on the real property and become the deeded owner. Then, quickly make improvements to increase the value of the real property and flip it. The strategy is: In and out - ASAP.
I had a perfect land flipping situation one time, but I didn’t wind up selling quickly: I bought 20 acres from an 86 year old woman (Miss Gertrude V.). The land had an old single wide on it, her home for decades. I cashed her out, closed and then quickly sold an easement to the developer next door for decent bucks.
I planned to sell the property right away, flipper style, but Miss Gertrude asked me to rent the single wide to her nephew and his wife. She had moved to a care facility nearby and wanted them close by. I drove over to her new digs (because she wanted to make the request in person) and she was just so damn nice that I couldn’t refuse. So, like a good boy, I rented the single wide to her family as requested. The renters were great people and kept an eye on things, paid me on time, and they visited Aunt Gertrude regularly like they were supposed to.
She passed away a couple of years later, the nephew and his wife moved to Idaho, and I demo’ed the single wide and sold the 20 acres as originally planned. It seemed the kind thing to do - complying with Miss Gertude’s wishes - and I felt better about myself for doing it… I still do.

Watch outs in land investing:

Zoning changes: Suggestion: If a seller or their agents ever tell you: “all you need to do is rezone the property” - watch out!!! I have never participated in an effort to rezone property and I doubt I ever will. This is a time consuming and arduous process involving many stake holders. Zoning board, elected officials, local residents, environmentalists, anti-growth groups .. and on and on.
In my opinion rezoning is for the biggest of the Big Boys with money, power, and a great legal and consulting team…that along with a boatload of time.
For more on zoning see: Zoning Basics: https://www.landdevelopmentrealities.com/home/2019/9/17/zoning-basics
Flipping: I described an unusual flipping opportunity, above, about selling an easement. However, in land I consider flipping as an uncommon way to find profit, so it’s a watch out as well as a possible opportunity. The reason is that improvement of land takes both money and time and flipping is a move in and move out quickly scheme. Getting out of land fast isn’t always possible, even with decent improvements.
Wholesaling land: What is wholesaling in real estate? A “buyer”, contracts so that he can assign the Purchase and Sale contract to another buyer, or buyers, at a certain point prior to closing. The wholesaler never intends to close on the property himself. Joe Blow, and/or assigns is the buyer and assigning the contract to another, at a markup, is the goal.
I might be able to envision a wholesaling scenario that doesn’t stink of rotting fish, but I can easily see many more scenarios that do.
Unsophisticated sellers may miss the “and/or assigns” language and wholesaling is about selling a contract, not really buying land or other real property.
I guess it would depend on individual state law, but it would also seem that many wholesaling situations would require a licensed real estate agent or attorney. My dead net on it is that wholesalers present themselves as bonafide buyers, but they are really contract negotiators and assigners as far as I can tell. Another watch out!

Is land a good investment?

All in all, my opinion is that an investor should view land as a supplement to a properly balanced portfolio not as an exclusive investment.

One exception might be those actually in the land business in some way, where they already hold an advantage. Another exception might be when acquisition cost can be recovered quickly, as in timber harvesting to recapture cost basis.

Land can be a great addition to a balanced portfolio of equities, bonds, cash, and other real estate assets such as income producing properties. It can help offset downturns in other investment categories and as they say - “they ain’t making any more of it”. Good luck and be smart about it!

Contact me at: ldr@landdevelopmentrealities.com