Investing in land for future development?

Question

Hello!

Has anyone ever invested in land to develop slowly over time? An opportunity has presented itself in my area where I can buy a large piece of land for 100K that is zones "no restrictions". This property is in a high traffic and desirable suburb area. My thought would be to build condos or duplexes to rent, or sell. Perhaps a 55+ community? This sounds nice in concept, but I would want to purchase the property all cash. This is contrary to my traditional approach to investing (mutual funds and mortgage pay down), although the potential ROI could be substantial.

Any thoughts, suggestions or advice would be appreciated.

Thanks,

Mike

Jim Goebel · Answer

@Mike Delavanti

Hi Mike

I actually was daydreaming thinking about this very subject today driving down the road in central Iowa.

Personally I'm ruling it out and here are my reasons:

• Risk which breaks down into:Regulatory - zoning could change, traffic patterns may change, Appreciation Risk - what happens if something changes and/or you're not in a strong position to get out of the deal later on - at some point depending on your time horizon you'll feel like you 'need' to sell to get out from it UNLESS you have a strong development / etc capabilities..... Or if the property doesn't appreciate 10x like you hope it will in 20 years
• Regulatory - zoning could change, traffic patterns may change, 
• Appreciation Risk - what happens if something changes and/or you're not in a strong position to get out of the deal later on - at some point depending on your time horizon you'll feel like you 'need' to sell to get out from it UNLESS you have a strong development / etc capabilities..... Or if the property doesn't appreciate 10x like you hope it will in 20 years
• Opportunity Cost of CapitalTime Horizon - while you're waiting years and years for this investment to come to fruition you could be deploying that capital to produce income for you and most importantly developing the capabilities that would give you the leverage to develop that valuable land later in life (buy it from some other bozo that had your plan, at a fire-sale, and develop it yourself)
• Time Horizon - while you're waiting years and years for this investment to come to fruition you could be deploying that capital to produce income for you and most importantly developing the capabilities that would give you the leverage to develop that valuable land later in life (buy it from some other bozo that had your plan, at a fire-sale, and develop it yourself)

• Regulatory - zoning could change, traffic patterns may change, 
• Appreciation Risk - what happens if something changes and/or you're not in a strong position to get out of the deal later on - at some point depending on your time horizon you'll feel like you 'need' to sell to get out from it UNLESS you have a strong development / etc capabilities..... Or if the property doesn't appreciate 10x like you hope it will in 20 years

• Time Horizon - while you're waiting years and years for this investment to come to fruition you could be deploying that capital to produce income for you and most importantly developing the capabilities that would give you the leverage to develop that valuable land later in life (buy it from some other bozo that had your plan, at a fire-sale, and develop it yourself)

All this said, my caveat questions are:

What's your time horizon?

Do you have capabilities to develop the land yourself and capitalize on the land?  (much stronger position to hold it if so)

What's your portfolio look like?  Something like this may pencil out from a risk perspective if say it only makes up 5-10% of your overall holdings, in my opinion.....  Mainly from a diversification strategy......

With the right answers of the last 3 questions and such, it MAY make sense.  Just not very likely I'd guess!!!!