Investing in .. land?

[al77]

I have a buddy who kept saying he is going to invest his extra money by buying land. From his opinion the land appreciation for a good lot in a good place can be around 5-6% per year.

There are several problems:
1. The land appreciation might be well below 5-6%. I am not sure?
2. Taxes on the land could be relatively high.

Where can I find these numbers? i.e. what was and is the appreciation of land and how much taxes I would need to pay?

What do you guys think, is it a good idea to invest by buying a good lot and later sell it to somebody who'll be going to build a house on it?

 

[Bible_Belt]

I'd suggest spending some time at your county courthouse learning how to research deeds and look up tax-assessed values. Taxes vary by county. The tax assessor's office is probably in the court house as well. You should go to some tax deed auctions, too. Each county usually has one per year.

Your percentage returns on empty land are very speculative. The biggest disadvantage to land is that it may take a long time to find a buyer. Also, land without buildings may not be depreciated for income tax purposes. If you decide that you want a property, try to spend enough time there to be able to tell if there is anything wrong with it. A property that is for sale may be on the market for a good reason that is not quickly apparent. It could be frequently downwind of a smelly industrial plant or have water drainage problems. Every property that you see for sale has been passed over by Realtors and professional investors as not being a good enough deal for them to buy it themselves. There are still good properties to be had, but skepticism is healthy. Try to figure out the real reason people are selling, which might not be the answer they give when you ask. If you buy at tax deed auction, research the hell out of the place before you bid. Some properties have easements, no road access, or title problems.

 

[DrMetallica]

Originally posted by Bible_Belt
Also, land without buildings may not be depreciated for income tax purposes.

Correct. Land cannot depreciate, only buildings & equipment can be. Now, let's say a mining company owns a mountain and uses up all of its mining resources... that's called depletion.

 

[cave dweller]

raw land

Hey,

Raw land questions? Check out:

agentsonline.net

and

creonline.com

Those two web sites should help.

cave dweller

 

[STR8UP]

There is a reason why they call raw land an "alligator". NO INCOME.

Buy improved property. Easier to rent. Easier to sell. Save the land speculating for when you have some experience and resources backing you up.

 

[STR8UP]

And WHY THE HELL would you be happy with a 5-6% return on your money?

That's pitiful. You could get more than that writing a mortgage on a single family home with very little risk.

 

[al77]

Originally posted by STR8UP
There is a reason why they call raw land an "alligator". NO INCOME.

Buy improved property. Easier to rent. Easier to sell. Save the land speculating for when you have some experience and resources backing you up.

This is interesting how everyone sees the situation only from his point of view. This is sure true for _you_, taking into account your experience. An F-1 driver finds even a new toyota prius pitiful.

Look:
1. No income: True, even worse I'll have to pay taxes.
2. Easier to rent. Easier to sell.: True. But this has a lot of setbacks as well for me:
- A house with land is in a developed area, therefore it is much more expensive than just land in not very developed area.
I obviously have very limited cash\credit and bank is not going to give me a good loan, if any loan at all.
- A house needs maintanence which means I need cash to maintain it. The taxes are much higher for it as well.
- A house requires constant finding of renters. This is not easy to do. And quite risky: Lets assume I got a mortgage: i am looking for renters...1 month - nothing. 2 months - nothing. All these time I'll have to pay teh mortgage and taxes, which means cash! Which I don't have in that amount, since my cash will go to downpayment anyway.

3. And WHY THE HELL would you be happy with a 5-6% return on your money? That's pitiful.
- This is actually great, since I'll not need to do much, just pay low taxes on the land. Though of course it is low return, low risk investment.
I simply do not have credit\cash\job to be able to buy a house. But even with my limited amount of cash I can buy some land.

By the way, do you think 5-6% is somehting that is real today in terms of land appreciation? It seem a bit high to me.

 

[SamePendo]

I'm in the same hassle.

I figured, hey, it'd be great to get a, house, apartment, and rent it, but it is much more expensive than land. Once you sell one or two lands, you have to money to complete, combined with a lone, or by itself, a house or apartment, and then you climb up and up.

 

[STR8UP]

A guy I know buys and resells vacant lots, and apparently makes a sh!tload of money doing it. But he FLIPS the contract, in other words, he writes the sales contract to close in 90 days and makes it assignable. In the meantime he finds a buyer at a higher price and sells the contract to the third party for a profit. He doesn't usually even ever own the land himself. It's all paperwork.

What you are talking about is buying and holding a property the costs you money to upkeep but provides no income. I don't know what the taxes and maintenance are going to be, but you better make a return better than 6% or it's possible you might not even hit a break even point.

And if you don't have the ability to get financed for a property that produces a rental income, how do you expect to get financed on vacant land? An owner might do it, but a bank won't.

I can't say that you won't make money on raw land. But I will say that generally speaking it is easier to get started by learning how to creatively purchase residential rental property. Then when you have built some equity you can borrow against it or sell and redistribute into more investments.

My partner and I started this way. We sold several properties in the last couple of years that we have owned for awhile and with the proceeds from the sale and a little extra money from private investors we managed to purchase 20 luxury condos and a restaurant, all of which already have between maybe $30k and $100k EACH (the restaurant might be closer to $500k) in equity over and above our investment. You do the math.

If you are still set on buying land, by all means give it a shot. I just think there are better ways to get started. But hey, I'm only speaking from MY experience.....you might find your niche and retire in three years.....who knows.....

 

[al77]

Originally posted by STR8UP

What you are talking about is buying and holding a property the costs you money to upkeep but provides no income.

And if you don't have the ability to get financed for a property that produces a rental income, how do you expect to get financed on vacant land? An owner might do it, but a bank won't.

I can't say that you won't make money on raw land. But I will say that generally speaking it is easier to get started by learning how to creatively purchase residential rental property.

You made all valid points except you are assuming for somebody like me, having zero experience in real estate, zero home improvement skills, almost zero credit it would be still easier to buy a rental property.

You are absolutely right: a bank won't even look at me when I ask them for a loan. And you are 100% correct that I am going to talk to a seller about it. I put 20-50% downpayment, I am sure this should be enough for just a piece of land.

I would like to believe you that it is easier buy a rental property for someone like me, it is not the case.
It is more lucrative, yes, more scallable, yes. But it is not easier if possible at all for the reasons I outlined before.

What would happen if I will not find renters for a long time?
What if a bank simple will not lend me a penny?
What if a house needs some repairs, where would I find cash to do it?

These are not very easy to deal with for somebody without experience in this field.

I have a buddy who bought land and build a house. Now he is looking for a land to buy, and maybe repeat the process or jus sell the land later. He is saying that according to his real estate agent land appreciation is about 6% for out area. taxes a couple of hundreds for a relatively small lot.
This is _at least_ doable.
Rental property requires a lot of resources and lots of cash "just in case". which not many people have.

If you would start from scratch, with almost zero credit and very limited cash (lets say 10-30k) would you still buy a rental property and look for renters?
But you would have to put almost all cash in the downpayment and have to start paying the mortgage. What if the rentters are not easy to find?

Yes, I feel that you are doing good. But this is probably the very reason why it is so hard for others to do anything.

If you would have to start from scratch what would you do?

 

[GirlCrazy]

You made all valid points except you are assuming for somebody like me, having zero experience in real estate, zero home improvement skills, almost zero credit it would be still easier to buy a rental property.

You could hire a property management company to do all that for you and still come out ahead.

My sister buys houses in Portland and rents them out. She has her own handyman, agent and loan guy. She does what work she can to save money, and her handyman does the rest.

My handyman charged me $25 to mount my TV, where Best Buy quoted me $600. You find a good handyman and you're set. As time goes by you learn to do basic tasks.

Nothing helps your skills better than having something that needs to be fixed - it's good motivation.

As far as owning land, it's generally a bad investment compared to buying real estate with improvements. There's a few exceptions like commercial land speculation, but that carries a higher risk.

One way to invest in real estate that I haven't seen on this board is real estate-related stock funds. It's the same gamble as buying a house, and it can give you the same return. The only difference is you get greater leverage with buying properties, but that comes with a higher risk. So if you have $50k burning a hole in your pocket, you can invest in real estate without getting your hands dirty. There's people making money off the real estate market who never own real estate directly.

 

[STR8UP]

I want to address what you just posted, but it's gonna have to wait until later. Gotta go get my drink on.

 

[al77]

Originally posted by GirlCrazy
You could hire a property management company to do all that for you and still come out ahead.

As far as owning land, it's generally a bad investment compared to buying real estate with improvements.

One way to invest in real estate that I haven't seen on this board is real estate-related stock funds. It's the same gamble as buying a house, and it can give you the same return. The only difference is you get greater leverage with buying properties, but that comes with a higher risk. So if you have $50k burning a hole in your pocket, you can invest in real estate without getting your hands dirty. There's people making money off the real estate market who never own real estate directly.

This obviously a good solution when you a fair amount of cash you can give to a property management company. You know, I don't have any cash to give it to home improvement at all, let alone a company that will eat even more cash.
To hire a handy man is definitely a better solution, well I think it is one of the best solution. Still have to pay cash, and maybe even a lot.

Not that I am saying Land is a the best investment. Or it is good. It is at least _doable_ for people with limited amount of cash.

I dig a little bit deeper on RE funds. In general they resemble all other funds: on average they might give like 5% return.
One year they have 20%, next 10% then -15%..

 

[al77]

Originally posted by STR8UP
I want to address what you just posted, but it's gonna have to wait until later. Gotta go get my drink on.

I would apprecaite your opinion as one from an expert.
Just a reminder: please don't forget that some, well, many people are not experts in RE at all.. they have very limited resources and zero experience.

For example: it is not a big deal for you to find renters and in general keep a property occupied without some major gaps, but for me it would be quite a challenge.

 

[sifer]

Originally posted by al77
I would apprecaite your opinion as one from an expert.
Just a reminder: please don't forget that some, well, many people are not experts in RE at all.. they have very limited resources and zero experience.

For example: it is not a big deal for you to find renters and in general keep a property occupied without some major gaps, but for me it would be quite a challenge.

Easy thread.

Resource is generally and most of the time not a problem.

Why would, in your example, finding renters to put into a house that needs some repair be a major challenge for you?

 

[sapphire]

If you research the real estate market well you can make a killing by investing in raw land.

About 18 months ago I bought two lots in cape coral Florida for $25,000 each. Now, they are both worth nearly $100,000.00 each. That is an appreciation of 300% during that period of trim.

I bought both lots with only closing costs of about $4,000.00. I just sold one lot for $85,000.00 since I needed a quick sell. You figure, I put only $2,000.00 down and therefore made a profit of $63,000.00 or a whopping 3000% return in just 18 months. With the profits made with that intitial investment I leveraged it to purchase 8 other properties.

I don't know where you are investing but 5% return on land is kind of lame. The best place to invest right know is south west Florida. Why? Because Florida, particularly the southwest areas like sarasota, port charlotte, cape coral, etc, is the number one job creating area in the country. It has what many people want and the land is not terribly expensive. Water, resorts, golf courses, etc.

Invest in areas where the economy is good and where people are flocking too.

Talk about the real estate bubble. I just don't see it.

 

[American_Psycho]

You could invest in mutual funds with expected returns of well above 5-6%

 

[LowPlainsDrifter]

Leaving volcanic action and (very expensive) landfilling aside, we're not making more land, and we certainly keep cranking out more people.

It's inevitable that land is a good investment, but as any econ 101 student who paid attention can/will tell you, the best land goes up in value first, and then when it becomes too precious, the next most marginal land rises in value, etc.

Very undesirable land will have to go up in value eventually, but that may take many decades.

The challenge here is to find "marginal" land that has overlooked potential.
The return a buyer gets is based on actual improvement, and perceptions that the improvements has turned that property into something desirable.

 

[STR8UP]

Originally posted by al77
You made all valid points except you are assuming for somebody like me, having zero experience in real estate, zero home improvement skills, almost zero credit it would be still easier to buy a rental property.

Don't assume you can't do something just because most people tell you that. Read the books that I suggested in my financial books thread. They will show you how to use your brain to compensate for other resources you might be missing.

You are absolutely right: a bank won't even look at me when I ask them for a loan. And you are 100% correct that I am going to talk to a seller about it. I put 20-50% downpayment, I am sure this should be enough for just a piece of land.

Keep in mind that if you have a big enough down payment you can have the worst credit in the world and still get bank financing. It's all about reducing their risk. Down payment compensates for a low credit score, and vice versa. I do whatever I can to keep my credit score in the mid 700's and I can get 100% financing on primary residences (106% by creatively writing the sales contract) , and as much as 95% financing on investment properties.

If you would start from scratch, with almost zero credit and very limited cash (lets say 10-30k) would you still buy a rental property and look for renters?
But you would have to put almost all cash in the downpayment and have to start paying the mortgage. What if the rentters are not easy to find?

It depends on what part of the country you are in and other factors, but I personally started with ZERO cash. I had the ability to borrow on some credit cards to get myself rolling, but no cash in the bank. I was able to buy properties by getting creative. Otherwise I could have listened to everyone telling me it couldn't be done and not done anything. I'm glad I chose the former.

ANd if you don't pay cash for the land you will still have a monthly payment. Your equation just doesn't add up. I don't see how you expect to make any money on 6% appreciation. Put your money on a mutual fund until you have some more credit and knowledge to start buying RE.

 

[al77]

Originally posted by sifer
Resource is generally and most of the time not a problem.
Why would, in your example, finding renters to put into a house that needs some repair be a major challenge for you?

I can't stree it more: this is not a problem.. for you or for anyone else who already has experience and cash\equity\credit etc.

But let focus on one of the the main obstacles: renters.
Here is a very likely scenario:
Lets assume I managed to get a loan and bought a tiny rental property. Now, how can I find renters in general? Put a sign "For rent"? Post some ads in a local paper? That would not attract many people immediately, so I'll have to wait months (!) until somebody will come up and agree to rent.
The problem: where would I find cash to pay the mortgage all these months? I don't have any since all of it will go to the downpayment since I don't have a good credit\job.

Next scenario is kinds an extension ofthe previous one:
I found a renter. All if good, until he decides to move out. Now it essentially boils down to the first scenario: I'll have to find renters and find them fast, otherwise I will not be able to pay the mortgage. But it takes months to find renters!

Why it is hard to find renters.
People either buy houses or if they cannot afford it, they simply rent an apartment or a room. Why would anyone in their sane mind want to _rent_ a house and not buy it?
I know these people do exist, I knew one person like that, but I thought she was simply not very knowledgable money wise.

How would you deal with these obstacles?

By the way maybe you know some other forums geared toward RE?