6 Ways to Make Money with Land – Part 2August 07, 2018 / Blog / 0 Comments
My last article outlined three fairly simple ways to make money from Land. The idea was to illustrate how a fairly typical but strategic land purchase can create strong investment returns without requiring complicated maneuvers.
Property Investment Strategies
We looked at three simple strategies:
- Do nothing (hold it)
- Split larger pieces into smaller pieces
- Buy for cash, sell on terms.
But real estate investors often do engage in complicated maneuvers, and for good reason: they can lead to stratospheric returns. This article is going to look at 3 additional methods for making money with land. And though these methods are significantly more involved than the first three, none of them require an investor to become a builder. Instead, they are all methods in which the land investor takes a piece in a good location, and makes that piece easy to build on by removing obstacles so the developer doesn’t have to!
Prepare land for sale: Make it easy for developers or builders
Here are three examples of how one might do that:
4. Entitle. Entitlement is the process of having various municipalities grant the many necessary approvals for a specific development plan. The result is parcels that are ready for building plans to be drawn and submitted for permits. Those parcels are far more valuable than the raw land from which they were designed. The act of designing a strategic development plan and obtaining the approvals to build adds tremendous value.
During the entitlement process the owner is essentially pitching a development plan for his land to the city. The owner submits design drawings, and the city reviews them, and often sends them back with required changes. The owner modifies and resubmits them. The result is a series of back and forth meetings and submittals between the owner (including his engineers, surveyors, architects and the like) and the city or county committees, until the plans are finally stamped “Approved”.
The types of issues that are clarified via the entitlement process include:
- Water and sewer hookups
- Electric utilities
- Building density
- Water management plan (flood water storage)
- Road approvals
- Public review and comment
If that sounds complicated, it’s because it is. The process is fairly tedious and often takes more than a year. It’s why builders hate doing entitlements and why land that is entitled is much more valuable than land that isn’t.
But it’s also why It’s such a great tool for the land investor. Entitlement works well with a buy and hold land strategy. Land investors are typically expecting to hold the land for several years anyway. They can add tremendous value during that time by working through the entitlement process. Further, the cost of entitlement is usually small compared to the value that it adds to real estate. It is minuscule when compared to the value of the buildings that will eventually be constructed and sold. If an investor can become versed in the entitlement process, he has what I would consider the most powerful tool available for creating dramatic land equity.
5. Profit Share with a builder. Being an efficient builder is beyond the reach of many of us (keyword: efficient). But we can still enjoy efficient build outs and participate in the builder portion of the profits by profit-sharing or joint venturing with a skilled builder. By so doing we tap into expertise and administrative attention considerably greater than our own.
Builders don’t like giving up some portion of their profits. They’ll do it because, as the owner of the land, you can improve the prospects for their building activity. Here’s how:
- Financing. Builders are faced with the down payment requirements of a construction loan in addition to the cost of acquiring the lots on which to build. If a landowner is willing to carry the value of the lot (in 2nd position behind a construction loan), builders are typically quite willing to generously share the profits. A typical agreement might have the lot owner allowing the builder to put a construction loan on the lot and carrying a 2nd position loan in exchange for splitting the profits 50/50. The price/value of the lot and other splits can obviously be negotiated.
- Repeat building opportunity. Builders like not having to go hunting for their next lot. Allowing a builder to move from one lot to another as houses are completed is a major bargaining chip in forging an agreement. That’s easy for a landholder to grant, but it makes a big difference to a small builder.
6. Assemble. Assembling land is the process of buying multiple contiguous pieces and joining them into a single project that can be entitled into something of higher value. You’ll see this strategy used in densely developed areas. Savvy buyers can pay what might seem to be stiff prices, only to submit the now larger parcel to the city for upgraded zoning. Land that was bought as single family home lots is then rezoned to multi-family, commercial, or even high-rise. These plays take a fair amount of work and negotiation but can pay off with big, radical changes in value.
Well, there you have it. 6 strategies for making money in land investments. Let me know about your successes in applying them!
At Arizona Land Partners, we are well versed in each of these strategies, and are always hunting for our next deal. We give the majority of our profits to our investors, and have a long history of making them happy. Give us a call to see how we can work together.