Archives for October 2013

Debunking the Myths about Land Banking, Part 3: I’m Too Young to Invest in Real Estate in California

In the last post of this series, we explained why you don’t have to be a developer to invest in real estate in California. Today, we’ll debunk a more serious and somewhat related myth: some people are just too young to invest in real estate.
First, let’s look at some of the reasons people think young people can’t invest in real estate in California.

• The cost is prohibitive.
People often think young people might be able to make other, non-real estate investments more easily because they are less costly. The opposite is true. In reality, even working college students with a few thousand dollars in cash on hand can invest in land. Why not invest in the stock market instead? Doesn’t it seem less expensive? Think again – creating a well-diversified portfolio takes resources, and a good stock market investor holds many different kinds of stocks.

• Young people can’t make responsible choices about illiquid assets.
Some advisors steer young people away from land because they thing young people don’t know what they’re doing and will make the wrong choices. To us, this just seems a silly. Young people are often more cautious with their money than established investors are, and in our experience, they are the hardest workers when it comes to researching their purchases and consulting with all the advisors they can find.
Perhaps young people are advised against buying land because investment advisors think that they will lack patience, wanting to sell the asset too soon. Here again, they are wrong; young people are more patient, as they have more time to watch their assets appreciate.

• Young people should be investing in high-risk, high-return products.
The idea that young people should never invest conservatively comes from the perception that all young investors are wealthy businesspeople or children of dynastic wealth. In fact, plenty of middle-class young people are eager to start saving for retirement and their children’s education, and these are not investors who have nothing to lose. The best investment portfolio for a young family includes at least one long-term, illiquid investment.

We’ve shown the mistaken logic behind the reasons people think young people should not invest in real estate in California. But are there good reasons to think young people should invest in real estate?

Young people are ideal land bankers. In California, land banking can yield profits over 20, 30, and 40 years, and the longer an investor can wait, the higher the profit is likely to be. Young people can wait. Further, land banking is an ideal low-risk and low maintenance investment for a young family or a young professional who travels often. Unlike other types of real estate investing, it’s easy to continue to hold a job while being a land banker – as most of us have learned, the same isn’t true for people who manage residential property.  In the end, it’s never too early – and a person is never too young – to plan ahead.

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California’s land in the path of development: some distinguishing features

When you consult with us and we show you land parcels, we’ll be showing you hand-picked pieces of California that we consider to be in the path of development. We’re invested in the very same areas, and we’ve gotten to know the land in Los Angeles County such that if it’s in the path of development, we think we can tell. So, what characterizes land in the path of development in California? Here are a few of the parameters we use to determine that.

• The natural features of the land are appropriate for development.
Before we consider a parcel, we look at its topography and the accessibility of water. Is the land flat and dry enough for developers to build on it? Is the water supply nearby? If not, is it easy to irrigate the land, not just in times of plenty but in times of water scarcity as well? Although Los Angeles County is near a port, freshwater can be difficult to find. Access to freshwater is a foremost consideration before we make any purchase.

• It is easy to expand into the land.
Although roads, electricity supply centers and other essential utilities may not be available, there needs to be a feasible way to build them. To understand whether it is possible to expand into the land, we consider the land itself, surrounding areas, and nonmaterial aspects such as government regulations, natural resources, and animal and plant life.

• An urban center is nearby.
Our choice of land banking in California made this part simple. Land in the path of development in California (or anywhere else) must be near a metropolis, so we chose Los Angeles County. One of the most important cities to the U.S. economy (and the most important in California), Los Angeles is still growing to accommodate technological progress as well as population expansion.

• Commercial and residential development is happening on the edges of the surrounding suburbs.
A seemingly insignificant area of land quickly becomes important when the cities and towns that surround it begin to expand. Before we recommend real estate to clients, we research what’s happening in the suburbs that surround it. If industries are moving outward, schools are building new campuses, and individual residents are building houses, that land is in the path of Los Angeles development.

• The information comes from a trustworthy source.
How do we do our research? Physical research is done in person or by our speculators. For other aspects of our land banking research, we consult city governments to ask about community plans that may be in place. We get as much information as we can from industry leaders in energy and transportation, but we also consult smaller businesses to discover their expansion plans.
These five criteria help us determine whether a piece of California land is in the path of development. Only after satisfying them do we recommend parcels to our partners, clients, and fellow investors.

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