Less-Speculative Land Investments


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.

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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.


How To Be A Dirt-Smart Buyer of Country Property, by Curtis Seltzer - Infinity Publishing 2007

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My Real Estate Investing Course - Sign up for free (the form is somewhere above or to the right).

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