Invest in raw undeveloped land and the rewards can far surpass your best stock picks. Several factors contribute to amazing returns with much lower risk than any other investment. Consider how the following factors can contribute to your financial strength.
• Land can be highly leveraged
• Land is a tangible asset
• Land can always be bought for less than market value
• Land can be exchanged without the profit being taxed
• Land can be improved
LEVERAGE - Most commercial banks will loan 70-80% of appraised value of land, amortized for 10-15 years. Leverage can increase your profit potential by 500%. Consider these two examples:
You have $100,000 cash to invest up front. You locate an excellent property priced at $100,000 and buy it using your $100,000. You sell it a year later for $120,000 making a $20,000 profit or 20% on your initial investment of $100,000. Not bad!
You use the same $100,000 to buy five properties for $100,000 each. You borrow 80% from a bank or with owner financing, putting $20,000 down on each of the five properties. Again, you sell all five properties at the end of the first year for $120,000 each. You earn a profit of $20,000 per property for a total of $100,000 - a 100% return on your same initial investment of $100,000.
In both examples you used an initial investment of $100,000, however in the second example you owned and controlled a half million dollars of investment property through the use of leverage in the form of financing.
TANGIBLE ASSET - When you own land, you control an asset that cannot disappear overnight, unlike the stock that tanked while you slept last night. While it’s appreciating, you can build on it, camp on it, cut firewood off it, lease it, or improve it for even higher profits. Or, you can ignore it. It won’t call you in the middle of the night. What it will do is appreciate while you sleep.
BELOW MARKET PURCHASE PRICE - You can always buy land for less than market value, but rarely can you sell it for more than it’s worth. The lesson here is that you only buy property that is priced well below fair market value. To do so, you’ll need to become very familiar with local land prices - both asking prices and actual selling prices. Either learn to do this on your own, or hire a buyer’s agent to do the research for you. These properties don’t come along every day, so you must be ready to commit to a purchase on short notice. To do that, you must be able to recognize an attractive price when you see one.
TAX-DEFERRED EXCHANGE - The IRS offers a method to avoid paying taxes on profits made in a real estate exchange. Actually, it is not necessary to actually swap one property for another. Say you purchase a property for $250,000, hold it for three years, and then put it on the market for $425,000. A buyer purchases the property which creates a taxable profit of $175,000.
Rather than taking the profit in hand, you find a replacement property of equal or greater value to the one you sold. Using the unused profit of $175,000 as your downpayment, you purchase another property for $450,000. Taking advantage of an IRS Section 1031 Tax-deferred exchange, the IRS assigns an adjusted basis to your new property of $275,000 (the $450,000 purchase price minus the profit of $175,000). You pay no income tax on the profit. Subsequently, you continue to sell and replace properties, each time deferring the tax on its profit. There are a few IRS requirements which are easy to meet, and this process will be covered in another article.
IMPROVEMENTS = VALUE ADDED - Raw land can also be improved while you own it. The property’s value can be increased from $2-$5 for each $1 in improvements. A simple example might go like this. You buy 50 acres on a well-travelled road. The land is unimproved and thus attracts little attention from passing motorists. You build an attractive white rail fence along the entire road frontage. Everyone now notices the beauty of the property. This is known as a “value-added” improvement. Just by improving the appearance, buyers will pay more when you sell.
If you’re tired of losing money on intangible stock certificates you never see or hold in your hand, land could be the best investment vehicle you will ever own. In PART 3 of this series, I’ll explain in more detail how you can benefit from land ownership.
