Part III of the Land Evaluation Series
Land banking is a simple concept that can be a wonderful strategy for investment. In the simplest form, raw land is bought, placed into a short or long-term hold (typically long-term), and sold for a profit. It sounds like an easy and fool proof way of making money, but be careful, it isn’t. If you don’t know the ropes, land banking can become a tough lesson in Land Investment 101.
There are certain factors that investors need to be made aware of when considering land banking. Whether you are looking to land bank 1000 acres or ten, these simple tips might prove to be the difference between a failed investment and a successful one.
1) Cash – Typically land banking investors need to have enough cash to take down the entire deal. Land can be difficult to obtain financing on because the raw land itself does not produce any cash flow at the present time to satisfy a mortgage payment. In order to obtain financing in today’s world, investors must show a strong financial position and put at least 50% down on the land they are buying (barring other circumstances this amount can be more or less). Have your cash available and ready to invest.
2) Taxes – It is important that you fully understand the tax climate for your specific state or local area. Knowing you can afford the yearly property taxes is essential. Some properties can have tremendous tax burdens associated with them and are sometimes overlooked. For some land banking investments, the amount that will be paid each year in taxes can be the determining factor of whether or not the property can be financially carried. Keeping property taxes affordable on a ten acre land investment within the 10 to 15 year path of progress, is much easier to manage than a 10 acre commercial tract in the heart of a major metropolitan downtown area. The taxing expectations for each of those properties are completely different.
Many States, including Florida, have property tax laws that provide significantly reduced taxes for land that is considered to be a “bona fide commercial agriculture operation”. Each county’s agriculture property tax agent ultimately determines what land does, and what land does not qualify. If the property you are considering investing in has the possibility of being put into an agriculture use in the interim, it is highly suggested to do so. The property taxes can be SIGNIFICANTLY reduced. This might be the difference in the overall carrying costs associated with the property and maximizing your return on investment. In addition, make your property work for you. Depending on the type of agriculture use that is placed on your property, there is the possibility of having positive cash-flow for your investment. While waiting for your investment to mature, make your property work for you in the interim.
3) Location, Location, Location – The location of your land is going to determine the success you will have in your investment. As stated above, these investments will have a certain length of time associated with a holding period. The closer your land is to development, the shorter the time to sell or develop your land. If your land is close to the path of progress, your input costs will typically be higher than a property further from the path of progress. Typically, the further your land investment is from the path of progress, the more time it will take for your land investment to come to fruition, and it should initially cost much less.
4) Time – Be patient! In today’s society of instant gratification, it is important to remember that land banking is a long term investment that will take time to mature. Rome was not built overnight, and the path to wealth will not occur overnight either. Ride the market highs and lows knowing that raw land has an amazing track record for appreciation. Some land banking investors have held their investments for decades. Know that your investment will take time to come to fruition.
5) Maintenance/Management – Many investors let their investment deteriorate after purchasing their property. Land is not an asset you can let sit idle. Buyers need to put a management program in place that works for the benefit of their property.
The more the land is maintained, the more “curb appeal” and success it will ultimately have. No one wants to buy trashed merchandise. Keep your property maintained.
6) Increasing Your Property’s Worth – Add value to your property by pursuing approvals for higher uses. Surrounded by agriculture land? Is growth coming your way? Do you have the vision that the land you own or want to buy is ideally located for a certain use?
As already mentioned, when you are determining properties for an investment, identify land that is in the path of progress and ideal for future development. Secondly, once you own that property, pursue highest and best use for your land. Higher levels of density and approvals = higher values.
Petition and provide plans to the governing boards that have jurisdiction over your land. Hire qualified advocates who are familiar with the area, who have worked with the governmental agencies in the past and know the political climate. Hire professionals who have experience in taking properties through the entitlement process. I have personally witnessed land owners and investors, who do not have any land experience, completely devalue their investments because of their incompetency. Swallow the pride, hire people who know what they are doing and take their advice. The money you will pay those professionals on the front end will be made up in multiples by the time your investment comes to fruition.
The same can be said for when you market your property for sale (or when you are considering buying), use professionals that specialize in land and have experience. It is always proves frustrating when dealing with residential/retail/office or other non-land related listing agents on land matters. It is immediately apparent they have no experience within the first 30 seconds of the initial phone call. This will ultimately move you further from your goal of selling the property and hurt your position. If I have a problem with my heart, you would suggest I go to a cardiologist. You obviously wouldn’t suggest I hire a dermatologist. In thinking about land, or any other segment of real estate, work with those who have specialized experience in a specific field (hire retail specialist for retail space, hire office specialist for office real estate, hire land specialist for land, etc…).
7) Liability – While your site is idle during the holding period, take steps to limit and keep your liability and risks low. Often, vacant land is often falsely considered to be open for anyone by the general public. It is unfortunate that we live in a society where the public believes that they can take the liberty to unlawfully use others’ property without permission. Typically, those people do as expected, and don’t treat the land as if they own it… because they don’t.
Don’t let your land become the meeting place for underage drinking parties. If it is a property that has game on it, don’t let your land become the “public hunting lease” for the local outlaws Jimmy Bob Ray, and his cousin Jim Bo Cooter Brown. And lastly, do not allow your investment to become a make shift land fill/garbage dump. This will bring you nothing but future liability and hardship. Dumping of trash can result in a slew of environmental problems that can take years to eradicate (if ever) and massive amounts of capital to cure (if even possible to do so).
- Fence your property and post “Private Property, No Trespassing, and No Hunting” signs.
- Have an advocate to watch over the property for you. Typically owners live far away from their investment. Befriend the local sheriff or police department, get their business cards and develop a relationship. If you have a problem, give them a call. Pay a nominal fee to have a manager swing by the property on a regular interval to check up on things and have him or her report to you periodically.
- Place your property in agriculture operations and or hunting leases. Therefore, there will often be a warranted human presence on the land. This will deter trespassers from coming onto the property.
- Mow the land regularly. If there are wetlands on your property, mowing will help deter any unnatural wetland encroachment.
- Speak to an insurance agent about coverage and other ways you can lower your risks.
While there are certainly other steps that can be taken, these seven simple tips should be a blueprint on how to make your investment flourish through economic ups and downs.
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