Archives for September 2013

I’m a young person. What should I invest in?

You’ve just landed a great job and paid off your student loans. Maybe you’ve started contributing to your 401(k). Young people are ideal investors, because they usually don’t have families to support, and they have many years during which their investments will have time to grow. How should young people make the most of their investment opportunities?

Many young people are attracted to the stock and bond market. High-risk, high-return products appeal to those with time to spend on them. We’re not here to discourage young investors from trading Wall Street products; be smart about it, and you’re likely to do well. However, many young investors, especially those who work in banking, are already wary of the market. After all, they were in school when the financial system ceased to function.

Others are interested in entrepreneurial ventures and startups, which are also high-risk, high-return products. When lending to startup founders, however, remember that the rate of startup success – those who survive for more than three years – lingers around 20%. Gloomier yet, the group of startups that IPO is just a small fraction of the total pool. However, if you have a passion for entrepreneurship, now is the time to enjoy it.

A smaller number of young investors seriously consider purchasing land. This puzzles us, as young people make perfect land bankers for two reasons:

First, young people have time. In land banking, the most impressive gains happen for people who give their properties time. Young people with at least 40 years until retirement can profit immensely from land, because land in the path of development is priced differently depending on how soon it will be developed. More expensive parcels are 5 or 10 years away from development; cheaper ones are further away. Young people who buy land parcels and wait for them to be developed can see 300% and 400% returns on their investments.

Second, the most profitable land developments will take two or three decades to come to fruition. In California in particular, interest in alternative energy (solar, biofuel, and wind) is growing. All of these solutions require large tracts of land, and building them into sustainable businesses takes time. Young people who invest in land to be used for solar or wind farming today will benefit the most from land banking.

Finally, land banking is a low-maintenance, low-stress way for young people to begin saving for… whatever they need to save for. Though retirement is far away, investing in land now will make it easy to retire in the future. When they do choose to start families, young people who are invested in land will have a stable, illiquid asset that can serve as a source of funding for their children’s college educations.

As a young person, it’s natural to be drawn to risky investments that promise instant gratification. But before you build your portfolio exclusively from stock and bond investments, consider the benefit of a stable, safe investment for the long term. Diversify through land banking. For more information, please contact us!

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A Little About Us: Why We Chose to Invest in Land in California

When people ask us why we invest in land in California, we split our answer into two parts: first, why we invest in land in California, and second, why we invest in land in general.

If you’re going to invest in land, California is the clearest and best option.

Firstly, the population growth in California is immense. 1 out of every 17 Americans live within a 60-mile radius of Los Angeles, and that number is growing. People will have to push out of the urban centers and move into less developed land: places that are two or three hours away from the most populous areas. This is where we’ve invested.

Secondly, California is a center for innovation, especially sustainable energy innovation. Recently, interest in solar energy has grown all around the country, and individual investors as well as organizations are building solar farms in southern California, where the land and climate is ideal.

Thirdly, real estate prices in California are relatively low at this time. The rule of the real estate market is no different from any other market: buy low, and sell high. When we saw prices drop, we knew we needed to invest here.

Fourthly, California, particularly southern California, has a historically resilient economy. Even when the economies of other states are suffering business and commerce flourishes in California, and employment is high. A resilient economy makes for a resilient land investment – the stronger the economy, the more developers will be interested in the area.

As you can see, it makes sense to invest in land in California. But what about the career choice in general?

Land banking is a lifestyle choice. It’s a different way to make money that doesn’t involve a corporate job during weekdays and business hours. In one sense, we work more than many people do – we’re constantly marketing by word of mouth, brainstorming new ideas together, maintaining our land, and researching other land investments. But in another sense, the sense of “work” goes away, and we’re left with a productive job we enjoy and learn from.

Land banking has freed both of us to pursue other goals in life, including funding a foster home in Vietnam. Working on these other projects is rewarding, and we see the benefit that comes from smart investing. The investment itself benefits us; we have financial security and peace of mind to last for many years.

Both of us have tried investing in other kinds of real estate, and we have owned rental properties. We both had bad experiences with tenants, regulations, and unanticipated costs. Even with a property manager, the upkeep of a rental property investment was overwhelming. Land banking frees us from that strain.

The best part about working in land banking, however, is meeting other land bankers (especially new ones). It’s interesting to hear other people’s stories and learn how they got interested in land; it’s also eye opening to work with new people with different perspectives. We are experts in what we do, but our customers and associates teach us things we wouldn’t have learned otherwise.

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Beginner tips for Land Banking in California

Land banking can be an ideal investment strategy, but if you don’t know what you’re doing, you might learn Land Investment 101 the hard way. Here are a few simple, ground-level tips to make sure your investment is a good one.

1. Understand taxes.

It’s a good idea to learn as much as you can about the tax systems in your purchasing region. Figure out whether you can afford the yearly property taxes. Some properties have prohibitively high tax rates, while others, especially land banking investments, are more reasonable. Expect different tax rates for different properties: a 10-acre parcel in a 15-year development path will have a more manageable total property tax burden than a 10-acre parcel at the heart of a metropolis. You may need to narrow down your options depending on the taxes you’re willing and able to pay each year.

Some states’ property tax laws tax land being used for agricultural purposes at a much lower rate. As you wait for your investment to appreciate, see if you can qualify for this reduction by growing something on your land.

2. Cash can help.

Today, it is difficult to obtain financing, especially for land. This is because raw land doesn’t produce sufficient cash flow to satisfy a mortgage payment. When investing, it’s best to come to the table with some cash or transferable funding on hand.

3. Location, location, location.

This is the theme of our site and our business, but it never hurts to repeat it. The location of your land parcel will determine your investment success. Location also determines the speed of turnover. A (usually higher-priced) parcel closer to the urban center or source of development will appreciate sooner, and you’ll be able to sell it in a shorter time. A parcel further down the path of development is a longer-term investment. Consider location and all the factors associated with it when you purchase land.

4. There is no instant gratification.

All good investments take time, so be patient: wealth doesn’t happen overnight. In today’s world of instant responses and lightning-fast connections, don’t panic when the market has a few lows, and don’t get too excited over a high. Be willing to wait it out; a long-term land investment will yield the greatest rewards.

5.  Protect the land.

After you purchase your land, it’s important to keep liability low. Though land requires less maintenance than other real estate investments, it needs some care. Here’s how:

•    Prevent people from thinking your land is a vacant lot. Put up “private property,” “no hunting,” and “no trespassing” signs.
•    You will probably live a fair distance away from your land. Get an advocate to watch the property, checking in on it once in a while, and befriend the local authorities. A small manager’s fee to make sure that someone walks by the property once in a while can save you a lot of grief later.
•    Mow and maintain the land, especially if there are wetlands nearby, to prevent wetland encroachment and maintain curb appeal.

If you follow these simple guidelines, you’ll have a more pleasant and rewarding land investment experience.

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Why Housing isn’t a Good Investment, but Land Is

You’ve probably read enough about investing to know that when your friend says, “I just bought a Lexus; I think it’s a great investment,” you can laugh. Although people constantly talk about their cars as “investments,” from an investment perspective, it’s much better to hold cash in a bank than buy a Lexus. Cars depreciate, and it’s almost impossible to sell a car for a higher price than the price you bought it for.

Houses are similar. Although it is possible to profit off of the sale of a house, houses are relatively durable products that still depreciate over time. Renovating and redecorating might make you money in the short term, but in the long term, a house isn’t a good investment.

That’s not to say that residential property can’t be a good investment under any circumstances. Of course, if you buy residential property with the intention to lend it out and collect rent, you can profit immensely. However, whenever you decide to sell that building to someone else, you’ll likely get it for the same price you bought it for. Consider the housing bubble. At its heart was the belief that a house is an investment – that it will never lose value, and at worst, it will remain the same. This fallacious logic resulted in a nationwide crisis. If individuals had focused on the value of land, however, rather than the value of housing, they may have fared much better.

Land is a good investment because it does not depreciate. At worst, land keeps up with inflation, retaining the same objective value over time. But land does not only maintain its value; it gains value.

Some finance and economics gurus claim that land, especially in America, does not gain objective value. It keeps up with inflation, and because America has so much land, there’s not enough scarcity to make it desirable. However, the reality refutes this argument. It’s easy to see that expansions of Metro systems, for example, make land around urban centers more desirable. This happens time and time again throughout history. It’s difficult to imagine how it could be any other way.

In response to the argument that land in America is not in short supply, we need to put things in perspective. It’s true that millions of acres of land in America go untouched and are in generous supply. However, much of that land is isolated from urban centers or has no access to water and other essential resources. In reality, land with desirable qualities (e.g. ideal topography, promising location, proximity to resources) is in short supply. For this reason, land can gain value astonishingly, and many landowners have sold their parcels at five, ten or twenty times the original price.

If you plan to rent it out, a residential building might be a good way to make money. However, housing is not a long-term investment. Land is a stable long-term asset with potential for growth. For more information about buying land for investment, contact us today!

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Do a need a surveyor? How about water rights? A few tips on purchasing land.

We’ve heard some incredible land stories, many of them positive. However, we’ve also heard of landowners who have made crippling mistakes, many of which could have been avoided quite easily. For example, we know of one landowner who purchased a parcel and then built a cabin on it, later to discover that the section on which the cabin was built was never his property. This anecdote illustrates one of the biggest and most common land purchasing mistakes: not hiring a surveyor.

A land surveyor’s primary responsibility is to determine and accurately notate the legal boundaries of a land parcel. Although surveyors do visit the land, they don’t only do fieldwork. They can choose one or more of many surveying specialties, and they work in offices, with people and government bodies, and, yes, out in the field. Surveyors use current and emerging technologies, especially the newest GSP systems and 3D laser scanners.

It is extremely common for people to purchase land without knowing its exact boundaries. Don’t make this mistake. A surveyor will give you a plat map (a three-dimensional drawing of the property) and mark its boundaries so that you know exactly what you’re purchasing.

Another part of knowing what you are purchasing: water rights. Wherever land is irrigated, water rights are especially important. A water right is what it sounds like: your right to use and/or irrigate water from a source, such as a well, stream, or lake. In California, water rights are determined based on prior appropriation, which means that water rights are bought and sold separately from land. Water rights can be mortgaged just like property. The first person who uses some quantity of water for industrial, household or agricultural purposes may continue to use that quantity in the future. The next people to use the water can use as much as they need for the same purposes as long as they don’t interfere with the pervious users’ rights. This order is based on appropriation dates: the first person has the earliest appropriation date; the second has the second earliest, and so on.

In times of drought, this prior appropriation system can leave some people with insufficient water supply. Different states have different provisions for this problem, and in highly populated areas, a government agency often allocates the water supply.

Land banking purchases happen in less populous areas. The water rights you may choose to purchase will be sold with their original appropriation dates; that is, you may purchase a water right with an appropriation date of 1910, and you will have priority of usage (for beneficial purposes) over someone with an appropriation date of 1925.

The water rights that are available in the proximity of your land parcel can determine its likelihood to be developed. When you research your land parcel, find out which water rights are available for purchase. Even if you yourself don’t purchase them, developers who work in the area may decide to use your parcel based on the water rights they can buy from someone else.

In closing, hire a surveyor, always. Water rights? That depends on your case. We’d love to hear your thoughts! Contact us for more information about knowing your property.

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Title Insurance: What is it, and is it a good idea?

Title insurance is a kind of indemnity insurance for property owners, often called an Owner’s Policy. It can usually be purchased at the close of the sale for a one-time fee and covers the amount of the real estate purchase. It remains valid as long as the owner or his/her heirs would like it to.

The first title insurance company was formed in Pennsylvania in 1853. Before that, the owner of the property was responsible for any problems with the validity of a land title. If the land title was shown to be invalid, he would lose his investment. A few more common hidden problems with title validity include:

• Forgery
• Undisclosed heirs
• Mistakes in examining records
• Errors or omissions in deeds

The cost of title insurance varies widely depending on state governments, which regulate the rates. Title insurance in California is usually slightly higher than average across all states.

So, is it a good idea to purchase title insurance? Unfortunately, there isn’t a perfect answer to this. For many buyers, it’s a good idea. Others feel that the risk of title invalidity is too low to merit the purchase of title insurance. But strange things can happen.

For example, this past May, a previously unrecognized Native American tribe in Utah laid claim to millions of acres of land along with gas, oil, water, and mineral rights on the property. Of the four counties affected by this claim, only one fought it.

In the 250-page claim, the tribe’s chairwoman claimed that the land had been allocated to the Shoshone tribe in 1861, and members of the tribe had been living on the property ever since. It would not be surprising if private property – perhaps a large amount of private property – was affected by this sudden development. How the government of Utah will handle the claim is still unclear. It is still possible that the tribe won’t gain ownership of the real estate, but there will definitely be a good deal of litigation.

Although Los Angeles County does not have many Native American tribes, title insurance protects you from other risks. When buying a home, many people find title insurance superfluous, especially if they know the previous owner lived there for 30 years. We disagree: homes have usually been bought and sold by many people, and it’s impossible to guarantee that the transaction was perfect each time. Title insurance has also saved many homeowners from unknown heirs and even foreclosure. Likewise, when buying land, especially as a long-term investment, the benefit and peace of mind of insurance is worth the cost. Title insurance is a way to protect your investment and yourself.

If you work with responsible sellers and brokers, you will be able to shop around for title insurance, refuse add-on fees, and save in other ways. If you work with us to purchase land, we will discuss the benefits of title insurance and provide you with personalized advice based on your purchase.

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5 Ways to Think (and Invest) Like the Rich

If you want to be rich (or financially independent), examine the investment strategies and thought patterns of the wealthy. You may be surprised by how similar they are. Below, we’ll list 5 investment strategies used by the wealthy and financially secure.

1. Diversify less.

Don’t leave yet – we believe in sensible diversification. Our investment advisors have preached to us hundreds of times about it. However, the wealthy know that the only way to make a lot of money is to take some risk. Although we don’t recommend the billionaire strategy of putting all your eggs in one basket, don’t be afraid to make one or two sizable investments that show promise while diversifying the rest of your portfolio.

2. Invest in illiquid assets.

No one ever got rich by holding cash. Wealthy people hold their assets underground (oil), in real estate, or in businesses. In fact, in interviews with wealthy businesspeople, many will comment that they don’t “feel” rich. That’s because the best way to protect and grow your wealth is to give it away, in a sense, investing it in illiquid assets and leaving yourself with relatively little cash. The only time very wealthy people or their families ever see large checking account balances is when they retire or pass away.

3. Sacrifice short-term gains for long-term ones.

The popular image of the wealthy investor who day trades and pushes papers around constantly was never based on reality. Rich people don’t see profit as a short-term thing; instead, they make long-term investments that will bring them huge windfalls all at once.

A favorite investment decision among the super-wealthy? You guessed it: land banking. Mary Fairfax, an Australian multimillionaire, is known for buying land on the outskirts of urban centers and waiting for it to reel it profit.

This strategy takes patience and discipline, but if you can change the way you see profit, seeing it as a long-term gain instead of a short-term incentive, you will multiply your wealth.

4. Serve growth industry leaders instead of competing with them.

You might not realize it, but within any growth boom, some of the wealthiest people are the suppliers, not the main players. Supplying resources to an energy company is easier and safer than trying to run one. Behind the scenes, the best way to build and protect a fortune is to supply something that all of the larger developers need.

5. Work is play.

This last point deviates a little from our investment theme, but it’s important. Wealthy people don’t work 40 hours a week – they allow their work and social lives to overlap. They enjoy themselves while they work and invest, and they also seek out moneymaking opportunities, even on their days off. Instead of leading two separate lives – one at work, and one outside of it – they build a lifestyle into which their work, investments, interests, and social gatherings all fit.

We hope you enjoy our blog. For personalized investment and land banking advice, give us a call or shoot us an email: we enjoy the conversation.

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Debunking the myths about land banking, Part 2: You have to develop land yourself to make money from it.

Wealthy land developers make the news, and not-so-wealthy house flippers make it onto reality television. Everywhere you look, it seems like people are profiting from real estate investments by building on or expanding the property they buy. But is that really the best or only way to make money in real estate?

In the last installment of “Debunking the myths about land banking,” we discussed the misconception that cheap land doesn’t yield profit. Today’s topic is similar: people think that they must develop the land themselves in order to benefit from it.

The reality is that the potential for profit is often higher when you develop land yourself, but the risks you take on are also more serious. As a land developer, you need an understanding of basic sources of loss (e.g. contractors, higher property taxes associated with buildings), and you also need to be able to anticipate the social and economic circumstances that will allow you to profit off of your work. You take more risks, and sometimes, the payoff will be higher.

Land bankers work with developers, not as developers. As a land banker, you research and purchase a land parcel based on developers’ plans for it, not your own. You sell the land when development increases its value.

“But what if the land doesn’t get developed?”
Some areas aren’t suited for development, but attractive land parcels located in ideal locations don’t just sit around. Urban centers are expanding constantly (especially in California), and through diligent research, you can discover the land parcels into which they will expand.

“You don’t want to develop the land – what makes you think other people do?”
Working people with full-time jobs outside of land development certainly don’t have the time to develop land. However, profit-seekers and professional developers (e.g. municipalities, energy companies) do this for a living. They seek out the land with the most potential and make money by developing it. As a land banker, you don’t partake in the profits they gain at the very end of their projects – you earn money in the middle of the process.

“What about residential buildings?”
Investing in residential buildings comes with a slew of hidden costs that often don’t hit you for months or years down the road. We’ve tried – and enjoyed – investing in real estate as landlords; it’s a good way to learn about yourself, the economy, and investing in general. However, it’s also a costly, time-consuming investment: if you’re just looking to diversify your portfolio by including illiquid investments that earn in the long run, low-maintenance land banking might be right for you.

In the end, your lifestyle and interests should determine the kind of real estate investments you make, if at all. However, don’t limit yourself by thinking that the only profitable investments are the ones that require constant upkeep and work. In the long term, land in the path of development appreciates, and you don’t have to be a developer to profit from it.

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A Brief History of American Land Ownership

History has tied land ownership to freedom. Titles of nobility and, later, voting rights have been directly related to land ownership. But how did land ownership become a central part of American investment culture?

Let’s start with the Greeks. They weren’t American, of course, but we get many of our values (including our love of democracy) from the way Greeks ran their city-states. Consider the hoplites. Hoplites were the citizens of these ancient city-states. Individually, they were small farmers and landowners. Together, the hoplites of any given city-state were a formidable military force (they invented the phalanx formation). When their territory was attacked, they came together as a group of nearly unrivaled citizen-soldiers. This model set the tone for the rest of Western civilization, especially America.

In later feudal societies, noble fighters were rewarded for their service with land. Royalty changed the rules, but land still entitled its owners to rights that renters didn’t have.

In America, land ownership came at a military cost. Before, during and after the initial colonization of the northeast, Americans fought to keep the lands they believed belonged to them. A little like the hoplite citizen-soldiers of the Greek city-states, Americans took up their arms when necessary and went back to their farms when it was over. Even today, we praise George Washington for his citizen-soldier-like conduct. After fighting in the Revolutionary War, he could have become king of America. Instead, he put down his weapons and went back to his farm.

George Washington is sometimes compared to the Roman general Cincinnatus. Cincinnatus was called into battle in a dire situation and given nearly dictatorial power. After winning the war, Cincinnatus also went back to his farm.

In the 1840s and 50s, the image of a virtuous land-owning farmer was popular in American political rhetoric. In 1848, a Free Soil Party emerged, demanding that the newly acquired lands in the west be made available to smaller farmers instead of wealthy plantation owners. These politics eventually led to the Homestead Act of 1862, which promised nonviolent people above 21 years of age a share of the land in the west. After the Act, people rushed into the available land, claiming titles rapidly and expanding into new areas. The Act was revised as more and more of the land was homesteaded, and finally, in 1988, the last homesteader received his deed to 80 acres of land in Alaska.

Meanwhile and even before the Homestead Act, land developers were busy buying land for investment purposes. Famously, Fred Trump and his son Donald Trump made careers out of buying, developing, and selling real estate for huge profits. Interestingly, a Scottish farmer names Michael Forbes taught Donald Trump a small lesson about the meaning of property ownership when he refused to sell his farm, where Trump wanted to build a golf course, to the billionaire.

Today, middle-class Americans are the most enthusiastic purchasers of real estate in the world; while real estate investment in Europe is stagnant or on the decline, Americans continue to purchase and profit from developed and undeveloped real estate, keeping land ownership as a cornerstone of American culture.

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California’s Housing Market: What it Means for America and for Land Bankers

In the past few months, the property values and purchase rates of houses in California have risen dramatically, particularly in certain metro areas. The rise in property values, though concentrated in San Francisco, Los Angeles, and San Diego, has been felt across the West Coast and might also have implications for the U.S. housing market as a whole. The price gain in these areas in California has been double that of the mean price gain in the top 100 cities in the country.

What it Means for Homeowners

Fear of a West-Coast housing bubble might instigate policymakers to change mortgage rates. Since it seems that the suppression of mortgage rates seen around the country is the main reason that purchases are rising, policymakers might feel pressured to raise rates and stabilize the growth of this market.

Around the country, things are not booming as they are on the West Coast. Climbing prices might discourage potential buyers from venturing into the housing market, so if national policy turns to raising mortgage rates, the West Coast boom might stabilize, but the rest of the country’s housing market might fall into stagnancy. Policymakers might have to choose between reigning in California’s market (allowing other parts of the country to become less active) and permitting the risks of an excitable market here in the West.

What it Means for Land Bankers

Sky-high selling prices and purchasing rates are good for land bankers. First of all, high costs of property ownership in urban centers will push more people into the suburban and surrounding areas, where the cost of living is bound to be lower. Suburban expansion is the “path of development” land bankers are always talking about – as people move out of cities, they need transportation, education, entertainment, and industry.

More subtly, the rising property values are a sign of the health of the West Coast Economy. This economic health is centered in San Francisco, Los Angeles and San Diego – three cities around which land bankers buy land. When the economy is healthy, an area becomes an appealing target for growth developers. That’s exactly what we’re seeing, especially here in southern California.  Developers have set their sights on these areas and are rushing in to take advantage of the fast-paced economic activity.

What it Means for Other Real Estate Investors

If you’re invested in California real estate property that’s already been developed, now might be the time to sell. People are willing to buy at high prices, and property is changing hands quickly. To us, this looks close to the peak of the cycle.

Land banking is a safe, long-term investment in a tangible asset. Anyone can invest, including working college students and people with IRAs (but no cash on hand). Are you interested in building a safe retirement and leaving a surplus to your family? Land in the path of development in Los Angeles county is inexpensive and easy to acquire. Contact us today.

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