1. Land Benefits: What are the benefits of land that make it a good investment?
a. Scarcity: there is only a fixed amount of land and there is no more that can be made or created.
b. Location: where a parcel of land is located can dramatically affect the value depending on many social and economic factors.
c. Improvements: improvements can be made “on” the land such a house, barn, shed etc. Improvements can also be made “to” the land, such as streets, sewage, utilities etc. From the standpoint of land investing, improvements “to” the land is an important aspect to value creation which we will discuss further.
Important Note: I believe that land itself has innate strength and makes for a good investment. However, you must understand how to evaluate what parcel of land to purchase, understand how to analyze each of the characteristics outlined above and how to do so quickly as a part of your investment strategy.
2. Market Value: The definition of market value for the purpose of this discussion is simply the appraised value of the land.
Important Note: There are many aspects of appraising property that are too involved for this discussion, but you should always consider at least the following:
a. Where is your value being created?
b. What are the comparable sales in close proximity to the subject parcel?
c. What are the social and economic factors that are affecting values now and can affect values in the future?
3. Sales price: The sales price is the price you are paying for the parcel of land.
Important Note: This may see obvious but all too often this point is not property analyzed. You simply need to know if you are getting a good deal. More importantly, can you evaluate if you are getting a good deal?
4. Financing: How is your deal financed? What is the method used to acquire the property?
Important Note: You should ALWAYS have a good understanding of the financial structure of your deal.
a. Financing is critical to the profitability and viability of your investment. If you don’t understand how to analyze your financing, DO NOT BUY UNTIL YOU ASK SOMEBODY THAT DOES UNDERSTAND AND CAN EXPLAIN IT TO YOU UNTIL YOU ALSO UNDERSTAND FULLY.
b. Cash out of pocket – Do not lose sight of the fact that one of the major benefits of real estate investing is leverage. You have to analyze your out of pocket investment against the opportunity cost of using that money elsewhere.
c. With leverage comes risk, so the natural question is… are there structures in place to mitigate your risk?
5. Cash flow: Is there any income being generated by the project?
Important Note: Land is not typically known as an income producing asset, however we will explore this further in another discussion. But as the saying goes…“Cash Flow is King.” In purchasing raw land, typically there is no cash flow opportunity for the investor. Without rental or other income being generated from the property, the million dollar question you have to HONESTLY ask yourself is, “Can I cover the debt service on the property?” I would suggest that you have at least 12-24 months of disposable cash in reserves available to cover the debt service in the case of an emergency. If you can’t cover the payment….do not buy. You should live by this motto, “If you can not pay…do not buy today!
6. Value Creation: What is your equity position in the project?
Important Note: Understanding your equity position is key. You must be able to evaluate what your equity position is now and where your value is going to be derived from in the future. As we discussed earlier, with land you have multiple opportunities for appreciation and equity creation.
a. Your value may not be based solely on market appreciation.
b. Keep in mind the fact that improvements to the land can be a significant contributor to where the bulk of the value is coming from.
7. Location: Where is your property located?
Important Note: We have all heard that in real estate location is everything. “Location…Location…Location.” Do a quick check to see how your property matches up in the 4 categories below:
a. Demographics
b. Access to major cities
c. Access to major highways
d. Proximity to schools and churches
8. Exit Strategy: How are you going to get out of the investment?
Important Note: Most investors beginning and experienced do not place enough weight on the exit strategy and pay dearly for this mistake.
a. Land by definition is not a liquid asset and generally can not be sold quickly.
b. You must plan your exit strategy in advance.
c. Have several options and know and understand the cost of these options.
d. Plan for the worst case scenario.
9. Power Team: Who are the agents involved in your land real estate transaction?
Important Note: It is important to know what agents are involved in your transaction. More importantly you must know their role and what you should expect from a good agent in each area. Also, you should understand what to ask and what you can do to make sure that you are getting the service that you need. Below is a list of the primary agents in a land transaction. We will discuss each category fully in another discussion.
a. Surveyor
b. Appraiser
c. Lender
d. Builder
e. Developer
f. Real Estate Agent
g. Title company
10. Know your investment Strategy: You must know what you are trying to accomplish before you start the process.
Important Note: Knowing your end goal, or investment strategy, in the transaction is critical. Your goal will dictate what actions to take as you move through the process. For example, asking yourself some questions can help point you in the right direction.
- Question: How long do I plan to hold the property?
- Question: Is this property in an area with a strong enough rental market for me to build, rent out and still make a positive cash flow?
- Question: Is this property one that I want to keep for my second home or for my family as a vacation spot?
Many investors do not properly determine their end goal up front and get themselves in a heap of trouble. Take time to think out your strategy, STICK TO IT, and you will have a much better chance of success.
Marvin Miles
MarvinTheLandMan.com
