The Tycoon Report

How to 'Land' the Best Deal on Real Estate

Friday, July 31, 2009 | Ethan Roberts

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Tycoon readers, ever wonder where writers get their article ideas from? Sometimes they come in unexpected ways!

I was alone in my car, cruising down Florida I-4, not too far from where a certain mouse has ruled over a vast kingdom of make-believe for decades. You know the place.

It was a grueling hot day (as are all July days in Florida), and an endless drone of talk radio was starting to really wear thin on my brain.

Welcome to the long, hot, boring Florida I-4!

Suddenly my cell phone rang, and it was an area code with which I was not familiar. A gentleman introduced himself as a Tycoon Report reader, and he wondered if I had a minute so he could pick my brain a little.

Well, far be it from me to turn down a request from a polite Tycoon reader, especially one who was calling at such an advantageous time. So, I was all ears!

Looks like the gent called me at just the right time...

Now it seems that this fellow, who lives in California, had bought some land in Arizona a few years back -- perhaps when prices were a bit higher than now -- and he was wondering what I thought about land investments in general, and whether or not he should sell the one-acre-plus lot he had purchased.

You know, if there's one constant thing that I find out about the real estate business, it's that the questions that I'm asked will most often have no clear-cut answer.

In other words, decisions made about real estate are almost always personal in nature, and the answers I give may vary according to the unique needs and situations of each investor or homeowner.

In addition, as I am licensed in the state of Florida only, I am restricted to giving specific advice or consultation to persons within my state.

So, I began to ask the gentleman a few general, yet pertinent questions, which you should ask yourself if you're in the same situation:

Is this a short- or long-term investment for you?
Did you pay cash for the land?
Do you need the money from the land for some other purpose?
What would you do with the money if you sold the land today, and do you think you could get as good a return with some other investment?

The gentleman told me that he had purchased the land with cash, as a long-term investment, and did not need the money right now. He did not seem to be sure where else he might invest the money right now if he were to sell this land.

So I then asked him to elaborate further:

Is the land waterfront?
Can you grow anything on this land?
Can you buy a mobile home cheaply and put it on the lot?
Could you lease the land to someone else for them to put a mobile there?

As it turns out, his lot does have water and sewer available for hookup, so a mobile home is certainly a possibility, unless there are any local zoning or subdivision prohibitions against doing that. Unfortunately, the lot was not on a waterfront.

Now, let me explain my thinking, and show how it relates to land acquisitions for investment purposes.

Land 'No'!

Personally, I am not normally a buyer of raw or improved land, simply because I would rather have an investment, such as a rental property, that produces income or other types of yield (e.g., principal pay-down on a mortgage) on a monthly basis, in addition to future appreciation.

Without monthly income or yield, a land investment is just a bet on future appreciation, which makes it no different than a bank CD (except that the CD is guaranteed), and the land certainly contains more risk (with the anticipated hope of a possible reward).

However, there are some things that you can do with land, as I explained to this investor, that can potentially generate some income for you while waiting for the land to appreciate.

For example, you can:

1) Buy an old mobile home (one that has already depreciated extensively), or a newer one that is in foreclosure, and install it on the land to be used as a rental home.

2) Find someone who wants to move their mobile home onto your land, and charge them a monthly lot fee.

3) Plant agricultural crops on the land that will produce an income when harvested and sold.

4) Plant inexpensive, small trees on the land that will grow up to produce income when sold.

It's interesting that Jimmy Rogers, the legendary investor who appears on CNBC from time to time, was asked where he will be investing his money over the next decade. Rogers said he will be investing in farming, as commodities and food are where the money will be.

Rogers' track record on commodity investing is extremely impressive, so I would not be inclined to bet against him.

Jimmy Rogers, legendary investor, farming for money...

Unfortunately, the investor with whom I was speaking was at a bit of a disadvantage, because he doesn't live anywhere near his land. So, farming or growing trees for timber, fruit, etc. becomes more difficult under those circumstances.

After we spoke for a while, the investor said he was going to look into the mobile home ideas, and we ended our conversation. He had some "food for thought" for his land, and I had some food for thought for this week's article.

Top 10 Considerations When Investing in Land

So, if you are considering buying some land as an investment, here are 10 important things to keep in mind:

1) Ask yourself, what is the direction of growth in the nearest large town or city? You should always buy land in the direction that the growth is headed. Then you simply wait for the growth to arrive and become established, before you sell your land.

2) How long will you have to wait? Who knows? Nota Bene, as they say in Latin, that land is almost always a LONG-TERM investment! I'm speaking of perhaps 10-20 years.

3) And since land is most always a long-term investment, do not count on being able to "flip" a parcel of land, unless you can buy it for dirt cheap (no pun intended), or better!

4) Waterfront lots are almost always excellent investments if you can get one for the right price. You often will hear it said, "They aren't building any more oceans or rivers or lakes," so these lots will undoubtedly remain among the most-desirable to future purchasers.

Riverfront lots for sale on the Gunnison River, Colorado. Hey, anybody seen my fishing pole?

5) Raw (unimproved) land is almost always cheaper to buy than improved (cleared) land, but that's because it will cost a great deal of money to clear the parcel. Factor that into your purchase offer for the property. And of course, if you can find improved land for the same money or less than similar raw land values, the improved land becomes a great deal.

6) Land must be purchased with cash. It is doubtful that you can get a long-term mortgage on land, and even if you could, the interest you would pay would eat up any long-term appreciation that you might gain! Lenders are generally not interested in putting up money for any land you do not intend to build on within two or three years.

7) Research the history of the area surrounding your land very carefully. You don't want to buy land next to an area that was once a toxic waste dump!

Welcome to the neighborhood...

8) Make sure that electricity, phone service, cable, and water and sewer are available to the property. If water and sewer are not available, you will need to make sure that a well can be built and a septic system installed.

9) If you are going to bring water and sewer lines to the property, always have a "feasibility study" performed. A land feasibility study is done to evaluate and determine the suitability of the soils relative to the land where an on-site sewage system is to be employed.

10) It is also important to have an appraisal, survey and flood certification done for the property, as part of your pre-closing due diligence.

So, that's how you "land" a good deal. Then see what can be done to maximize your return on income from the property.

This week, I would like to hear from any of you land owners, specifically as to where and why you bought your land, and how you have done financially as a result. Have you "landed" any great deals?