Ways To Make Money Investing in Land – Part One
Everyone has heard that land is a safe and stable investment, but you may not know why. In this multi-part series, we’re going to learn all of the different ways that you can make money investing in land.
The first way we’ll discuss that land can make you money is through leverage. Leverage is using borrowed capital for an investment while expecting the profits made to be greater than the interest paid. Daily Thomas, vice president and branch manager of First South Farm Credit in Birmingham said that while interest rates have been historically low, lately they have been creeping up a little but have been holding pretty steady in the low to mid 3% level for shorter term fixed products and up to the low and mid 5% mark for longer term instruments.
“The stock market has been pretty good lately and if you can make eight to ten percent in the market with your money, why not borrow funds at four percent to purchase land? You’re still clearing six percent just from that and you are anchoring your portfolio with a non-depreciable asset that most likely is going to appreciate in value over time,” Thomas said. “So, it is kind of a win-win there.”
Let’s take the following example: If I invest 100,000 of my own cash in land, and that land’s value goes up $8,000, I’ve made an 8% gross return on investment. Using leverage, if I invest $20,000 of my own cash in land while borrowing $80,000 and my land goes up 8,000, I’ve made $8,000 on $20,000, or 40% gross return before debt service. Land (Real Estate) is one of the few assets that you can leverage to acquire.
If you have enough equity in a piece of property and a good investment comes up, you can use your existing parcel to leverage the purchase of the other property.
“If a person has property that’s paid for, and they want to buy another piece of property, we can take a mortgage loan on what they already own, using the equity there and they are basically covering their down payment with the property they already have,” Thomas said. “Equity loans or even lines of credit are options for timber management or having available funds for livestock. As far as the versatility of land goes there are a lot of possibilities”
Thomas said that while short term gains can be made on land flipping, it is basically a long-term investment. “Land is a long-term investment and even with some short-term dips over a 30-year period the chances are really, really good that the value is going to be worth more than it is today,” Thomas said. “So, hang on to it and you should come out ahead.”
Leverage is a powerful tool that, when used to buy good investments, can compound your wealth building. While the possibilities of the above examples are exciting, it’s important to understand that leverage cuts both ways. If your investment goes down in value, the percentage loss is also compounded negatively. Anytime you use leverage to make money, you had better make sure you do your homework into what factors may cause a land’s value to go up. It is important to seek out experts (like land professionals) who understand the different components of value in a property and can help you spot which properties have the best chances for appreciation and possibilities for earning increasing revenue.
It goes without saying that the value of the property is greatly influenced by location and demand. A parcel of land in what was once considered a “remote” location may now, because of spreading population and growth patterns, be in a prime location and suddenly in demand for development and transitions to a “higher and better” use. While I’d argue that our rural land is of the “highest and best” use as it sits, certain characteristics of the property, such as physical and legal access, along with location, may make it attractive to industrial and business interests and even for municipal projects like roads, major highways, business parks and even airports. That all equates to property appreciation.
An industry “rule of thumb” is that a property owner can expect to see his dirt appreciate at a compounded interest rate of around 1.5% a year for basically just holding on to it. It can go up to around 10% or even higher depending on a development plan for site improvement and enhancement and the attributes of the property itself. This is independent of commodities being produced on the property such as timber or crops.
For example, there may be timber that can be harvested on a rotating scale, farming or even mining and mineral extraction that can help appreciate the value of the parcel. Some of those improvements can be depreciated.
You can do a number of things to “force” appreciate the value of the land and that includes building and developing barns, camps, road systems, food plots, ponds, or even converting an existing stand of pine trees into pine straw production. Anything out there that if you spend $1 on and it gives you a return over and above that $1, that is a cost-effective improvement. In addition, there are certain improvements, such as burning, spraying, road work, construction of fire lanes that can be written off your taxes that year so appreciation and depreciation really helps at both ends.
Hunting and farming leases are another way that you can increase net operating income (NOI) from the tract. If you have a piece of property that you aren’t personally using, and you find yourself asking, “is hunting land a good investment?” The answer is, yes, it makes sense to put the dirt to work and derive some income from the land. While hunting and farming leases are common, there are an increasing number of ways that landowners can share their property to generate revenue.
New York based company Tentrr is aiming to help landowners earn more income by leasing their land for camping. They even set up luxury campsites on your property that guests can then rent for the night or the weekend. They’ve created a marketplace where landowners can even sell their camping guests extras such as firewood or kayak rentals.
As you can see, land is a versatile resource that offers many opportunities to make money and enjoy the property at the same time. Try doing that with a publicly traded stock. In part 2, we’re going to learn about even more ways that landowners are making money and look at more investing in land pros and cons. Did you know you can get paid to NOT cut down your trees? Stay tuned…
First South Farm Credit