Investment Strategy Considerations - Why Land? Why Now?
I'm often asked - Why should I invest in land? When should I buy? Admittedly, I have a biased opinion on this subject and therefore I encourage you to challenge my positions, but I'd like to convey some key points for you to consider and research...
Keep in mind my comments are focused on rural, farm, ranch, and timber land, not speculative "development", "in town" or "in the close path of progress" land. One must buy carefully, and identify certain features that will enhance the marketability or productivity of the land.
Also, be advised I am not suggesting land offers any type of "get rich quick" plan - in most cases be prepared for a medium to long term investment (there are exceptions) - and there are no guarantees in life except death and taxes!
Speaking of taxes - have you looked into the tax benefits of Conservation Easement property? Give Don a call...
Some items to consider...
1. Under all is the land.
Land is fundamental, foundational, fixed, and flexible - do nothing or everything with it. Think about it - land itself is basically indestructible and fixed in supply (they're not making any more of it).
The IRS appreciates these characteristics: Last time I checked, on a capital project you can depreciate the cost of structures but cannot depreciate the cost of land - to me this indicates the enduring quality of land.
2. Timing is important.
Timing is extremely important. As we have all learned (especially) in the last few years, timing is key. It has been said that profits are made when you BUY, not when you SELL...
But - having said this, I just don't see the volatility in the rural land marketplace. Although I occasionally see some "fire sales" and "underwater" owners - it's not so much in the rural marketplace (especially if major improvements have NOT been made on the land).
3. Be careful about too many improvements.
I have seen many situations on rural property whereby owners have "over-improved" and will have a difficult time recouping their investment. If you are thinking about that exquisite cabin, guest lodge, etc. make sure you have thoroughly considered the ramifications. (I'm separating personal enjoyment from an investment/resell perspective.)
Consider this: Instead of throwing 300K into building that high end vacation cabin, how about 100K into a vineyard, apple orchard, or blueberry field? How about planting trees to be harvested over the next 40 years? Perhaps go with a more modest cabin. These are improvements that can potentially have tax advantages, produce income and will prove attractive to a Buyer down the road.
4. Be careful about no improvements.
Sellers - I have also seen many, many situations whereby owners have settled for much less than they should have received for their land due to total neglect.
Buyers will naturally not pay top dollar for a property that is overgrown without internal roads or clearly marked boundaries. These properties are hard to get around and show - naturally, folks want to see what they are getting and most will not follow behind me with a machete cutting through dense overgrowth... See these Land Improvement tips and ideas.
5. Land is fun, literally therapeutic.
Its hard to go out and enjoy a mutual fund but phenomenal to go out and enjoy your own property. I have told many that I can literally feel the stress leaving my body when I pull up to the gate on my land.
There's nothing like working and improving your land. If you hunt or fish, its hard to describe harvesting game on your own property, especially when you have invested good game management practices on the land.
So - in this high stress world we all live in, perhaps a good piece of land is the least expensive therapeutic and stress reliever out there!
6. Long term, does land beat Wall Street?
According to some real estate investment analysis, timberland has historically "beaten" the stock market over the long term. (I've provided a few web links on the subject below but invite you to Google "timber and timberland as an investment" and read the numerous articles for yourself.)
The formation of TIMOs - Timber Investment Management Organizations and REITs - Real Estate Investment Trusts with specific focus on timberlands (again - please Google these terms for additional info) speak to the importance of timberland as an investment vehicle on a large scale with a large number of investors.
As you absorb these articles keep the following in mind...
- The analysis may be considering large organizations who are buying land by the tens or hundreds of thousands of acres, thereby acquiring land at wholesale prices.
- These organizations also have more overhead than the individual investor.
- These organizations generally don't improve their properties when selling - individuals buying this type of property are generally more apt to strategically improve the property for a better resale price.
- Basically, don't compare an individual purchase to a huge TIMO, but do consider the common denominator being the timberland asset.
- The "fun" factor is not considered.
7. How to look at land from an investment perspective... What about land investment as a retirement strategy?
I do believe land can offer a solid investment and offer retirement income. This income can be from appreciation and from putting the land to work - creating an income producing property.
What if someone took a raw piece of land and over time developed a profitable cattle ranch or organic fruit and vegetable farm? Long term, timber has about a 35 year life cycle but if you are interested in less "management" than a farm or ranch planting timber today can produce income over the long term - money does in fact grow on trees! I have clients investing in timberland as a retirement plan or as a college fund for the kids!
Uncle Sam can even assist in the development of your farm! - the USDA has several programs under the Farm Bill that can help with capital expenditures with cost-share programs.
I know of a gentleman who acquired timberland "on the side" over a long career and is now enjoying the fruits of those investments - he can appropriately manage the timber on those hundreds of acres acquired over a lifetime and is now enjoying very nice retirement income on the timber value residing on these properties.
I have personally more than tripled the value of a self-directed IRA account strictly on land transactions. Google "self directed IRA real estate" and read up on it!
Need a significant tax break? Google "Conservation Easements" and check out some articles on the subject...
8. When should I invest in land? Why now?
As a buyer, from an investment perspective, you certainly want to buy during a normal market or in a "buyers market"... That's when sellers are more motivated, prices are depressed, etc.
You don't want to buy in the heat of the bubble.
Looking into the future here in 2018 many are bullish about the future of the economy. I tend to take the optimistic view. I wish I had a crystal ball!
9. Land Investment Related Links...
"Buying Woodland for Fun and Profit" Forbes Magazine, December 2009
"Investing In Timber" InvestmentU
"Conservation Easements: a Good Investment for the U.S. South" WRI Insights
The landcrawler.com links page has some great links for more information on Self-Directed IRA's, Conservation Easements, 1031 Tax Free Exchanges, USDA's cost-share programs, etc.
-- Don Ellers, ALC, Associate Broker, Southeastern Land Group