Thee are some general land investing strategies, which, if followed, should provide a good probability of positive results.
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Before making a property investment, conduct thorough research and planning. This starts with evaluating the current market value of the property based on recent sales and the previous purchase price. Asking prices may not accurately represent the true value. Once the current value is established, create a detailed plan for the property, focusing on the target buyer and necessary improvements. Consider factors like potential zoning changes, subdivision options, costs, holding period, and likely selling terms. Avoid purchasing land without a clear goal in mind for the future buyer or usage. Blindly investing in land without a specific strategy risks relying solely on market growth and assuming all land investments succeed. While this strategy might lead to success in the end, there is also a risk of failure, making it a somewhat unreliable method. The likelihood of achieving significantly improved and reliable outcomes is greatly increased with thoughtful planning and preparation.
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To enhance profitability, it is often advantageous to buy a large piece of land and then divide it into smaller parcels for sale. This “buy in bulk, sell individually” strategy is based on the idea that there is greater demand for smaller land plots, leading to higher per acre values. While minimizing costs is important during the division process, there may be a need for certain enhancements to increase the overall appeal of the smaller parcels.
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Leverage should be maximized when purchasing land, as long as it is done within reasonable limits to avoid financial strain in case of unexpected setbacks. This typically involves minimal down payment, a lengthy contract, and low interest rates. The specific amount of leverage that can be used will vary depending on the property being purchased.
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To fully benefit from the leverage principle, the leverage used when buying the land should be higher than the leverage used when reselling it. If the property is resold under the same highly leveraged terms, the advantages of leverage are diminished, even if the value of the land appreciates. This is because selling the land under installment contracts delays the release of the full appreciated value as cash to the investor. It is more beneficial for the investor to cash out quickly after reselling the property, especially if the property is close to its final use. This is because it is more likely to be sold for cash or with a higher chance of early cash-out if sold under installment contracts, as the final user would likely need ownership of the land for further development. The key, therefore, is to purchase property that is the point of final use.
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Non-professional investors often seek out cheap properties in the mistaken belief that better deals can be found in areas that are far from populated centers or lacking in essential features that drive property prices up. These features vary depending on the type of property but generally include factors like accessibility, utilities, drainage, and proximity to major traffic routes. It is important to focus on purchasing high-quality properties that have inherent value and all the necessary characteristics to attract potential buyers. Avoiding bargain-priced properties that are undervalued due to inherent deficiencies is key to ensuring easier and more profitable sales in the long run.
The most crucial factor in determining the quality or value of a property is its location. Predicting future growth and development is key. A strategy that can be effective for small investors is to look for land purchases near where large developers, companies, or institutions are acquiring property. Sometimes there is a delay in the increase of land values after a major development announcement, but not always. For example, when a major biotech firm announced plans for a new headquarters, a friend bought land nearby immediately after the announcement and saw a significant increase in value within a year. Minor developments, on the other hand, may temporarily inflate property values unrealistically. It’s a good idea to check with local planning agencies to see where upcoming commercial installations or major developments are planned, and if nearby properties have potential even without the pending development, it could be a wise investment opportunity.
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One good rule is to only consider properties that are expected to increase in value by at least 20% per year. Studies have shown that land values in the United States typically double every ten years, resulting in a 7% annual growth rate. Therefore, to achieve a 20% growth rate, you need to find opportunities that are well above average. It’s common to be swayed by price, but the key factors for profitability are appreciation rate and purchase terms. It’s important to carefully analyze the entire transaction from start to finish, as isolated details can be misleading. In this context, appreciation rate is crucial in determining profitability, and successful investors focus on identifying areas with extraordinary growth potential. While a 20% growth rate doesn’t guarantee a good return, it does increase the likelihood of a favorable outcome given the right buying and selling terms.
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It's clear that this rule is fundamental. However, it's being mentioned here to emphasize the importance of determining what is considered an acceptable rate of return. Different investors will have varying profit objectives based on their goals, available investment opportunities, and level of expertise. Nonetheless, it seems reasonable to establish some general minimum standards. In my opinion, aiming for a minimum compound annual rate of return of 20% is a sound guideline, but I want to emphasize that this is just a personal suggestion and should be evaluated in the investor's specific context. Land investments come with risks and limited liquidity, so if the potential return is below 20% annually, it may not adequately compensate for these drawbacks. When assessing a potential investment, it's important to consider different scenarios, from optimistic to pessimistic, with the 20% minimum rate of return intended as the most likely outcome, representing a probability of around 75%.
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There are three essential forms of intelligence information needed for land investment, or tasks that must be monitored.
(a) Overall Area: The first aspect is about understanding the overall area. It is important to be aware of the general development trends that impact the growth of different regions and suburban areas within a major metropolitan area.
(b) Regional Districts: Another level of surveillance focuses on particular areas or zones within the larger area. Skilled investors typically focus their attention on these specific districts or regions that seem most promising for growth and investment opportunities.
(c) Specific Sites: Ultimately, surveillance and research on potential land investments extends to specific locations that are potential investment options. Utilizing competent real estate agencies can aid in the search for and understanding of various investment opportunities within a particular area. These firms can assist investors in conducting necessary groundwork on potential sites, including details on zoning, utilities, local development plans, surrounding property values, and other essential information needed to make informed decisions. It is recommended that investors leverage the expertise of real estate firms for this purpose, as they specialize in providing such services and are compensated accordingly. However, it is important to note that real estate firms typically focus on specific districts or regions, so their services should be sought after once a particular area with promising potential has been identified.
This brings us back to the initial two forms of surveillance or investment intelligence. It is crucial for investors to grasp the overall trends and factors that impact the growth rates of different regions within a larger area. An advisable approach is to focus on one or two specific regions that show the most potential for growth and concentrate investments in those areas. This necessitates gaining a deep understanding of values, zoning regulations, infrastructure projects like road construction, upcoming commercial or residential developments, and the comprehensive plans set by governing bodies that oversee the region.
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Re-zoning is a reliable method to increase the value of a property significantly. Most cities have strict zoning regulations set by the local planning agency. However, with population growth and urban expansion, there are often revisions to these zoning laws. Changing land from one classification to another can result in a significant increase in property value. For example, if commercial land is re-zoned for residential use, or if single-family homes are re-zoned for apartment complexes, the property’s value is likely to rise considerably.
There are two ways to approach the re-zoning strategy. One option is to choose land for investment that is strategically located in areas likely to be upgraded due to metropolitan growth pressures.
Another option is to choose and protect potential sites by signing suitable legal agreements where the sale is dependent on the successful application to rezone the property for a particular purpose. This typically requires creating comprehensive plans outlining the proposed use, as well as appearing at hearings in front of relevant bodies to obtain the necessary zoning changes.
Whether the reclassification of zoning regulations is actively pursued or not, it is an important factor to consider when evaluating different sites. If all other factors are the same, a site that has the potential for zoning reclassification will likely be a more promising option compared to one that does not have this potential.