NEWBIE: Getting Feet Wet in Land Investing
The world of land investing can be daunting for the first time buyer. In this post I will be presenting some of the things to look for when purchasing land. While this posting will not answer every question you may have, it will provide you with a solid foundation of knowledge in which to grow. If you have a specific concern please feel free to contact me directly, I would be happy to offer further assistance.
An Overview:
First… Intent.
Why are you buying land in the first place? Is it for future use? A place to build a second home or are you going to retire there? Is it for investment purposes? Are you looking to hold it for several years and then sell it? Keep in mind that your initial reasoning behind your purchase may change. It is quite possible that a lot you had bought for an investment with the intention of selling in 5 years ends up being the perfect place to build your ideal getaway. Something like that is always a possibility. But, knowing why you are looking in the first place helps in the decision process. For example, if you know the property will be for future use, then strong emotions could come into play when buying it. As the locale for you and your family where memories will be created, “falling in love” with a property can trump the logistics, numbers, and logic involved in making a decision. While letting emotions influence your decision is OK, you still want to research what it is your buying so that later down the line, the “love” isn’t replace with “hate”. For example, you buy the property and build your 3,500 sq foot dream home on it. Later you realize that there are no protective covenants in the community… the reason why your next door neighbor set up a single wide on his/her lot. On the other hand if your goal is investment and investment only then emotions need to play a less prominent role. For example, you find an excellent priced lot in a wonderful community near a major city with all the amenities. The numbers all work and work well. If you view it and feel, “Ehh, ho hum” and then pass on the opportunity completely based on those emotions, then you could be letting many great investments pass you by.
Second… Know Your Resources.
Purchasing land has been a solid and stable way to create wealth for decades. But, as with any investment an inherent risk is always involved. Take the time to look over your finances. Know your spending limits before you head out and begin actively gathering information on parcels for consideration. Research what options are available to you and look into alternative methods of funding. For example, with the volatile stock market many people are now discovering that they can use their 401ks/IRAs for land investment purposes.
Third…Research The Properties.
Your overall goal is to determine if the true value of the property meets/beats the asking price and then project, based on different factors, whether the property has the potential to grow in value. This is where doing your homework comes into play. Some of the main factors that effect the value of property are location, type of property, size of property, property features, is it located in a flood zone, is it located by itself or in a community with protective covenants, what percentage of the community infrastructure is completed, and amenities.
Fourth…Compare.
After looking at and collecting information on various properties, compare the individual particulars of each lot. One of the mistakes inexperienced buyers/investors do is lump all of the types of property together without viewing the details and then wonder why one costs a fraction of the other. Not all property is created equal. For example, you find two properties labeled “waterfront”. One costs $29,900.00 and the other $99,000.00. Why the difference? This is where you begin comparing the different factors.
Waterfront $29,900.00
Location: Remote location, over 60 miles from nearest city with population under 10,000. City has had limited growth over last decade.
Type of Property: Waterfront
Size of Property: ½ acre
Property Features: Tree’d.
Elevation: Above sea level.
In Flood Zone: Yes.
Community: 30 Lot Total with No Protective Covenants.
Infrastructure: Community infrastructure is 85% completed.
Amenities: Community boat ramp.
Waterfront $99,000.00
Location: Within 15 miles of major cultural hub and city with population of over 1 million. City still expanding and growing.
Type of Property: Waterfront
Size of Property: 1 acre
Property Features: Combination of both.
Elevation: Above sea level.
In Flood Zone: Yes.
Community: 25 Lot Total with Protective Covenants.
Infrastructure: Community infrastructure is complete.
Amenities: Boat ramp, pool, tennis courts, and day dock.
After comparing the features of each property the reason for the price difference becomes clearer. You now have a greater understanding of what differentiates these properties… you’re off to a good start. This is the key to purchasing land, know your facts and gather as much information as you can to make informed and educated decisions. But there is more, and each of the above factors can be broken down even further. For example, under the “waterfront property” factor there would be additional particulars that you would want to be familiar with such as the body of water it is on-deep or shallow, amount of water frontage, access to bigger water, amount of wetlands, and boat dockage… key factors in determining the property value. I will explain each factor in greater detail after this 3 Part-NEWBIE Series Overview in the NEWBIE DETAILS Series.
Fifth… Where to go for Financing.
You’ve researched and decided that you’re ready to purchase your new lot. If you are buying through a land developer or broker many times they will have purchasing options in place for you to choose from. Although not restricted to using their options, it is worth investigating. Many times the land developers and brokers establish a rapport with a particular bank ensuring that the clients they refer get certain benefits. If you choose to go your own route be aware that certain factors could lead to larger expenses. For example, if you and your bank reside in one state and the property you are purchasing is in another your bank might charge more for such things as an appraisal, recording fees or higher points. Regardless of the method you end up choosing make sure you ask questions and always, compare the facts.
Sixth… Types of Financing.
There are many options in financing, too many to completely list here. But, a few of the most common methods are:
Cash: Pro… own the property free and clear. Con… ties up cash that you could possibly use to secure other investments that came along.
Lot Loan: Interest rates are low right now which makes investing at this time advantageous. Loan options include Straight Amortization - 10 to 30 years depending on the bank, and a Balloon Option - 1 to 5 year balloons amortized over a 10 to 30 year period.
IRA/401K: Most IRAs and 401k’s will need to be converted to a self-directed IRA. This allows you to invest your money the way you want to, within the IRS guidelines, without having an administrator to choose where they want the money to go. Many times plan administrators are only allowed to place the money you invest within certain areas as guided by the company in which they work. While a popular investment strategy for many, it does take control out of your hands and puts it in the hands of someone else. For those of you who wish to have a more hands on approach to directing your investments research a Self Directed IRA. By allowing you to choose where your money is going you might enjoy the greater freedom, power, and choices you gain in handling your own portfolio.
Whatever options you choose know that your decision will affect your goals in regards to property turnover and your carry costs, factors that affect your profit margin. So take the time to research carefully.
In Conclusion…
This 3 Part Newbie Overall just touches the surface of the factors involved in making a solid land purchasing decision. The more you know, the better chance you have of stepping away with a positive outcome. Knowledge and doing your homework won’t eliminate all the risks in land investing, but it will eliminate the unnecessary ones. So ask the pro’s questions, go to seminars, read books, join networking communities, take classes… educate yourself. Ultimately, the final decision to buy is yours. Take ownership of your decisions instead of letting it fall completely on the shoulders of others, and you’ll be setting the stage for success.
An Overview:
First… Intent.
Why are you buying land in the first place? Is it for future use? A place to build a second home or are you going to retire there? Is it for investment purposes? Are you looking to hold it for several years and then sell it? Keep in mind that your initial reasoning behind your purchase may change. It is quite possible that a lot you had bought for an investment with the intention of selling in 5 years ends up being the perfect place to build your ideal getaway. Something like that is always a possibility. But, knowing why you are looking in the first place helps in the decision process. For example, if you know the property will be for future use, then strong emotions could come into play when buying it. As the locale for you and your family where memories will be created, “falling in love” with a property can trump the logistics, numbers, and logic involved in making a decision. While letting emotions influence your decision is OK, you still want to research what it is your buying so that later down the line, the “love” isn’t replace with “hate”. For example, you buy the property and build your 3,500 sq foot dream home on it. Later you realize that there are no protective covenants in the community… the reason why your next door neighbor set up a single wide on his/her lot. On the other hand if your goal is investment and investment only then emotions need to play a less prominent role. For example, you find an excellent priced lot in a wonderful community near a major city with all the amenities. The numbers all work and work well. If you view it and feel, “Ehh, ho hum” and then pass on the opportunity completely based on those emotions, then you could be letting many great investments pass you by.
Second… Know Your Resources.
Purchasing land has been a solid and stable way to create wealth for decades. But, as with any investment an inherent risk is always involved. Take the time to look over your finances. Know your spending limits before you head out and begin actively gathering information on parcels for consideration. Research what options are available to you and look into alternative methods of funding. For example, with the volatile stock market many people are now discovering that they can use their 401ks/IRAs for land investment purposes.
Third…Research The Properties.
Your overall goal is to determine if the true value of the property meets/beats the asking price and then project, based on different factors, whether the property has the potential to grow in value. This is where doing your homework comes into play. Some of the main factors that effect the value of property are location, type of property, size of property, property features, is it located in a flood zone, is it located by itself or in a community with protective covenants, what percentage of the community infrastructure is completed, and amenities.
Fourth…Compare.
After looking at and collecting information on various properties, compare the individual particulars of each lot. One of the mistakes inexperienced buyers/investors do is lump all of the types of property together without viewing the details and then wonder why one costs a fraction of the other. Not all property is created equal. For example, you find two properties labeled “waterfront”. One costs $29,900.00 and the other $99,000.00. Why the difference? This is where you begin comparing the different factors.
Waterfront $29,900.00
Location: Remote location, over 60 miles from nearest city with population under 10,000. City has had limited growth over last decade.
Type of Property: Waterfront
Size of Property: ½ acre
Property Features: Tree’d.
Elevation: Above sea level.
In Flood Zone: Yes.
Community: 30 Lot Total with No Protective Covenants.
Infrastructure: Community infrastructure is 85% completed.
Amenities: Community boat ramp.
Waterfront $99,000.00
Location: Within 15 miles of major cultural hub and city with population of over 1 million. City still expanding and growing.
Type of Property: Waterfront
Size of Property: 1 acre
Property Features: Combination of both.
Elevation: Above sea level.
In Flood Zone: Yes.
Community: 25 Lot Total with Protective Covenants.
Infrastructure: Community infrastructure is complete.
Amenities: Boat ramp, pool, tennis courts, and day dock.
After comparing the features of each property the reason for the price difference becomes clearer. You now have a greater understanding of what differentiates these properties… you’re off to a good start. This is the key to purchasing land, know your facts and gather as much information as you can to make informed and educated decisions. But there is more, and each of the above factors can be broken down even further. For example, under the “waterfront property” factor there would be additional particulars that you would want to be familiar with such as the body of water it is on-deep or shallow, amount of water frontage, access to bigger water, amount of wetlands, and boat dockage… key factors in determining the property value. I will explain each factor in greater detail after this 3 Part-NEWBIE Series Overview in the NEWBIE DETAILS Series.
Fifth… Where to go for Financing.
You’ve researched and decided that you’re ready to purchase your new lot. If you are buying through a land developer or broker many times they will have purchasing options in place for you to choose from. Although not restricted to using their options, it is worth investigating. Many times the land developers and brokers establish a rapport with a particular bank ensuring that the clients they refer get certain benefits. If you choose to go your own route be aware that certain factors could lead to larger expenses. For example, if you and your bank reside in one state and the property you are purchasing is in another your bank might charge more for such things as an appraisal, recording fees or higher points. Regardless of the method you end up choosing make sure you ask questions and always, compare the facts.
Sixth… Types of Financing.
There are many options in financing, too many to completely list here. But, a few of the most common methods are:
Cash: Pro… own the property free and clear. Con… ties up cash that you could possibly use to secure other investments that came along.
Lot Loan: Interest rates are low right now which makes investing at this time advantageous. Loan options include Straight Amortization - 10 to 30 years depending on the bank, and a Balloon Option - 1 to 5 year balloons amortized over a 10 to 30 year period.
IRA/401K: Most IRAs and 401k’s will need to be converted to a self-directed IRA. This allows you to invest your money the way you want to, within the IRS guidelines, without having an administrator to choose where they want the money to go. Many times plan administrators are only allowed to place the money you invest within certain areas as guided by the company in which they work. While a popular investment strategy for many, it does take control out of your hands and puts it in the hands of someone else. For those of you who wish to have a more hands on approach to directing your investments research a Self Directed IRA. By allowing you to choose where your money is going you might enjoy the greater freedom, power, and choices you gain in handling your own portfolio.
Whatever options you choose know that your decision will affect your goals in regards to property turnover and your carry costs, factors that affect your profit margin. So take the time to research carefully.
In Conclusion…
This 3 Part Newbie Overall just touches the surface of the factors involved in making a solid land purchasing decision. The more you know, the better chance you have of stepping away with a positive outcome. Knowledge and doing your homework won’t eliminate all the risks in land investing, but it will eliminate the unnecessary ones. So ask the pro’s questions, go to seminars, read books, join networking communities, take classes… educate yourself. Ultimately, the final decision to buy is yours. Take ownership of your decisions instead of letting it fall completely on the shoulders of others, and you’ll be setting the stage for success.
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