6 Ways to Make Money with Land – Part 1July 27, 2018 / Blog / 0 Comments
Arizona Land Partners looks at 6 smart ways to make money with land:
- Do nothing (hold it).
- Split larger pieces into smaller pieces
- Buy for cash, sell on terms.
- Land Entitlement.
- Profit Share with a builder.
- Assembling land.
Three Simpler Ways
People often ask me, “What is it you actually do to make money from land?” It’s no secret that land investments make a lot of people wealthy, and most investors don’t need convincing that a person can create a lot of wealth through land investments. But they are often unclear as to what successful investors do with the land in order to realize the great returns that they have so often heard about.
I’ve pursued lots of different ways to invest in real estate: building, rentals, trading contracts, wholesaling, etc.. But if I had to pick the one that I believe offers the best returns with the lowest risk, it would be simple land investments. Those are investments in which an investor or partnership purchases a land asset and later sells that asset for a substantially appreciated price.
So what is it we actually do in order to sell land assets at increased prices? Here are 6 answers. 3 of these answers are easy-to-implement, non-complicated methods to increase values and are offered in this article. 3 require more effort and understanding and will come in Part 2 as a separate article. All 6 are time-proven ways to make money from the land.
Three Easy Ways to Make Money from Land
1. Do nothing (hold it). This one isn’t so sexy, but don’t be fooled – it’s probably the most powerful of the 6.
Land in the growth corridors of growing metro areas appreciates at double-digit rates. That appreciation comes in multi-year spurts that are generated by the region’s development cycle. For reasons I’ve discussed in other articles, as a metro area grows land appreciates at a substantially higher rate than developed property. Houses or small commercial buildings in established areas might be appreciating annually in the 5-6% range while the land that is being purchased for new development is appreciating 15-20% per year. Add the possibility of buying land below its current market value and you have the making of fantastic returns. We’ve had many such purchases that have increased in value as much as 50% for each of 3-4 years, selling for 3.5 to 4 times what we originally paid.
2. Split larger pieces into smaller pieces. This strategy is often overlooked by new land investors, especially those who are coming from a rental property or single-family home background. Unlike buyers of buildings, land investors get big discounts for buying in bulk. Smaller pieces of land sell for a higher price per acre (or price per foot) than larger pieces, even within the very same market.
That makes for a simple but effective investment strategy to make money off land: Buy in bulk, then sell off in pieces. Most counties will allow investors to make a small number of splits without going through the planning or zoning required for a full subdivision. Just doing the simple, over-the-counter split into 3-5 pieces typically has a substantial impact on values.
3. Buy for cash, then sell on terms. Whenever a seller is willing to carry with a reasonable down payment, he raises the market price of the asset he’s selling. In markets where financing is hard to get, the value increase is substantial.
For residential property, the buyers are often home builders. Builders have a recurring problem in having enough cash to buy land and then also cover the substantial cost of building a home. If a seller is willing to carry, he can make his piece much more attractive to a builder.
The combination of splitting larger pieces into smaller and carrying is a powerful, often used approach, generating outstanding returns even when the purchase or market dynamics are unremarkable.
Take as an example a 73-acre parcel I recently bought with an investor friend. We paid just under $5,000 per acre, all cash. The market value of the property at the time of our purchase was somewhat higher than that (we found a decent deal). We plan on holding it only long enough to get long-term capital gains treatment. During that hold period, I’m expecting reasonable, though not extreme, appreciation. Then we’re simply going to split the piece into 5 estate lots of nearly 15 acres each, offer to carry for 3-5 years at 7-8%, at a price of $12,500 per acre. The important point here: there is nothing remarkable about this deal!
Our purchase numbers are not dramatic, or exceptional. That is, it was a good deal, but a deal a diligent investor could reproduce. But look at how the numbers work when you do the math. The chart below is figured on the price of a single acre but applies regardless of how many acres we include in a given sale. I’ll put in conservative numbers ($10,000 per acre resale price, 5-year carry, 6% interest). Notice the annual rate of return of 25%. That’s the interest rate I’d have to receive from a bank, or the return I’d have to get out of the stock market every year to match the return of this fairly typical land deal.
That simple purchase, split, resell and carry would generate $11,400.00 for every $5,000 acre purchased, a great return from a reproducible purchase!
That’s enough for an article today. Read Part 2 here, outlining 3 more complicated methods that can create much greater value.