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Of all real estate investments, why land banking?

Still reeling from the financial crisis, many middle-class Americans are clamoring for tangible, less liquid assets and turning away from Wall Street products (stocks, bonds, CDs, and similar investments). Perhaps because real estate offers a glimmer of familiarity, many people are using their investment funds and leverage to purchase developed real estate. In fact, when most people think of investing in real estate, they think of purchasing apartment buildings and houses, collecting rents, and waiting for those investments to appreciate. They don’t think of buying pre-developed land.

However responsible these investors may be, their investments aren’t as secure as they think. The recent financial crisis was, above all other things, a housing crisis. It was proof that housing prices can be as volatile as the stock market is – you can’t depend on developed property to appreciate; in fact, it might depreciate. These considerations bring us to the reasons land banking trumps other real estate options when it comes to investing.

1. Almost no risk of depreciation.

Unlike developed land, land in the path of development almost never depreciates. In the worst case, it gains value slowly over time. In many more cases, it appreciates tremendously and promises strong long-term gains.

Why is that? Land, unlike houses, doesn’t depreciate, because there isn’t going to be any more of it. Buying a parcel of land is buying a part of a finite resource. But land banking isn’t just buying land (as is commonly misunderstood): land banking is buying well-researched land that is in the path of development. Over time, this land will appreciate, because developers will build other assets on top of it.

2. Less work.

When you invest in developed real estate, you must manage your property (or hire a property manager), taking responsibility for problems like leaky roofs. You must also manage tenants, maintain legal permissions, and constantly juggle incoming cash and leverage. Though developed real estate is a long-term investment, it carries daily costs that not all of us have the time or desire to pay.

Land banking, on the other hand, allows you to invest safely for the long term and then put your investment (almost) out of your mind. While investing in developed real estate brings excitement (and sometimes havoc), land banking brings peace of mind. When you purchase a parcel in the path of development, your job is to wait for the development and take advantage of the appreciation at a time that makes sense to you.

3. More high-return opportunities.

How does land banking offer better opportunities? Within your own lifetime, you may have seen a small town turn into a much bigger one through municipal expansion, population growth or rezoning. These changes are dramatic, and the value of a land parcel pre- and post-development changes accordingly. The return on land in the path of development after sale is higher than the return on “flipped” real estate. In other kinds of real estate investing, business acumen and strategic use of leverage can pay off; land banking pays off even in the absence of those. It’s a logical choice for an opportunistic investor.

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What land bankers really do

Regular bankers research the organizations to which they lend and study the products they buy and sell. They research the bonds they purchase. Does land banking have a parallel?

Yes. Land bankers, like financial bankers, study risk and return. They are experts in certain products – bankers understand financial products; land bankers understand real estate. Before committing to land parcels (or selling them to clients), land bankers consider hundreds of subtle aspects of the land. They gather a broad scope of information and data to make a holistic decision about the current value and future price of a piece of land. Below, we’ll discuss just a few of the things land bankers consider when they analyze land in the path of development.

1. Demographic patterns.

The most important factor in the development and appreciation of land is the local population. It’s obvious that designated farmland handed down from generation to generation won’t be developed into an urban center anytime soon. But what other demographic clues to land bankers look at?

• Historic growth patterns in the surrounding areas. How have humans developed land in this region before? What kinds of industries thrive here?

• Ages of the population in general. High concentrations of young people or increased numbers of children signal demand for education as well as entertainment. Additionally, with larger groups of young people comes a desire for better access to urban centers and greater tolerance for technological and energy expansion.

• Occupations of the surrounding population. Some industries expand underground; some industries build sprawling complexes. Depending on the skills and jobs that prevail in the area, expansion might come in different forms, and land parcels may be suitable (or unsuitable) for that kind of development.

• Net worth of the individuals in the area. Do they seem like potential entrepreneurs?

2. Geographic and topographic limitations.

Along those lines, land bankers study geography (and often geology!) to learn what kinds of land are suitable for which kinds of development. Swampland is good for almost nothing, but flat, fertile land isn’t always the desired choice, either. Land in the path of development needs to geographically and topographically match the kind of development that may happen there.

3. Transportation funding.

Transportation is a major indicator of development. Land bankers analyze trends in private and public funding for transportation to find the areas into which developers are planning to expand.

4. Civic leadership.

Land bankers pay close attention to an area’s leaders, sometimes attending open conferences and town hall meetings to learn more about what the leaders want to do in the region. Often, information about future development is out in the open, but people don’t pay enough attention to local politics to see it as a way to inform their investments. Land bankers come in to close that information gap. If you’re working with a land banker (or becoming one yourself), a good test of competence is to find out what the land banker knows about civic leadership. Experienced land bankers will give you an earful!

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Debunking the myths about land banking, Part 1: Why Buy Cheap Land?

We love what we do, and we talk about it often. Inevitably, we get questions like, “Why should I bother to buy cheap land? Isn’t it just money down the drain?” These kind of prevailing misconceptions are one of the reasons that people who do choose to buy cheap land do so well. People are misinformed, so demand is low; demand is low, so even moderate appreciation in value can yield impressive gains. Let’s explain.

Myth #1: “Cheap land doesn’t exist here in the US.”

Let’s get this one out of the way. We don’t know where it comes from, but we hear it all the time, especially from people who live in cities or highly populated suburbs. Developed land in those areas can cost $500 or more per square foot, but the United States is full of pockets of cheap land in the path of development, which opportunists see as factors of production and sources of profit.

Myth #2: “Cheap land is probably worthless (or a scam). Otherwise, why would it be so cheap?”

The “too-good-to-be-true” mentality is perhaps the number-one reason people refuse to buy cheap land. They believe that no one would sell valuable land at a low price. We don’t blame them; it’s true that some sellers have convinced people to buy cheap land that has only limited potential. However, valuable land can be available at affordable prices for many reasons, including the following:

a. The sellers bought it at even lower prices, and it has appreciated enough for their purposes.

Just like you, other people invest, wait ten or twenty years, and sell their investments when they feel that they have profited. Twenty years ago, land that’s now available at $5 per square foot may have been $0.50 per square foot. Sellers who are ready to retire and have held onto the land for that span of time may be satisfied with the returns they’ve earned.

b. The sellers are willing to negotiate lower prices because they aren’t attached to the land.

One of the best ways to buy cheap land is to negotiate with the sellers until it’s cheaper. Undeveloped land, by definition, isn’t the same as residential property. People selling their homes feel emotionally attached to them and are less willing to sell below the asking price than sellers of undeveloped land are.

c. Many people don’t do their research, so demand is low.

Finding good land to purchase takes time and energy. Often, demand for good land is low simply because people don’t do the research required to find parcels with the most promise. When demand is low, prices are low, and sellers are forced to reduce their prices. For this reason, well-researched land banking yields astonishing returns. If you can locate and buy cheap land in the path of development, you need only hold onto it and wait for developers to get there. However, most people aren’t willing to go the extra mile (sometimes quite literally) to isolate the best real estate investment opportunities.

Now, next time you hear someone exclaim, “Why buy cheap land? It’s probably a scam!” you’ll know how to answer.

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How to Buy Land in California With the Assets You Already Have

So, you’ve decided that you want to learn how to buy land in California. After all, they aren’t making any more of it. But how can you finance your investment?

How to buy land in California with cash:

Option #1, and the one most people think of when they consider buying vacant or undeveloped land, is to invest cash. In this case, you’ll convert the most liquid asset into one of the most long-term investments – it’s a good idea if you have enough of that liquid asset.

You can purchase land by paying it off with cash or financing it with a loan. If you do choose to invest with a mortgage loan, you may avoid some of the risks related to paying off the entire property upfront. Many of our clients choose this fairly straightforward option when considering how to buy land in California.

How to buy land in California with your IRA:

Option #2 is to use an Individual Retirement Account (IRA) to invest in land. If you already have an IRA, investing in land is easy. Unfortunately, some IRA custodians, particularly larger firms like Fidelity, Rowe Price, Morgan Stanley, etc., don’t permit real estate investment. They permit only traditional stock, bond and mutual fund investments, excluding options like real estate, precious metals, and private IRA lending.

In order to diversify and invest in real estate, you may need to open a self-directed IRA with a different custodian. You can easily transfer funds to the new account from your former custodian and invest in land.

If you don’t yet have an IRA but you have a 401(k), you may still have the option to invest in real estate with your IRA.

Here’s how to buy land in California with funds from your 401(k):
If you no longer work for the company to which you contributed 401(k) funds, you can move funds from your 401(k) to a self-directed IRA. You can open a Traditional or Roth IRA. Even if you still work for the company that hosts your 401(k), you may be able to withdraw funds after speaking with your company representative.

The benefits of investing in real estate with your IRA (as opposed to purchasing land in cash) are:

•    Broaden the scope of your investments and remedy an underperforming stock portfolio.
•    Pay zero out-of-pocket cash.
•    Depending on the type of IRA you have, you can eliminate the taxes on your portfolio’s growth.

No blog post can give you the personally tailored financial advice you need. Some customers benefit from converting their cash assets into long-term real estate investments, while others, having suffered a drop in IRA returns, are looking for a way to diversity the investments they have already made and turn stagnation into gain. Your financial advisor or IRA associate is the best person to speak to about how to buy land in California most appropriately with the assets you have. Many of our clients choose a little of each – they purchase land in cash and include land in the path of development in their IRA portfolios. Contact us via email, phone, or web chat for more information on how to buy land in California.

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How Can I Decide Where to Buy Land?

If you live and work in an urban or heavily populated suburban area, how can you decide where to buy land? Land nearby is probably expensive or unavailable, and you might not travel to the more remote places in your state (where large areas of land are often available for sale). People who want to make money on their land purchases (not just hold on to large amounts of wealth without paying heavy taxes) can pay attention to three cardinal principles of where to buy land:

Where to Buy Land – Rule #1: By the Water.

Oceans are not wet deserts; they are the travel spaces that connect cities, countries, and the world. The world’s industrial and financial centers are all port cities or communities near the ocean, and there is a good reason for that. The more interconnected people become, the more valuable land near the water will be. On the west coast, ports are expanding at astonishing rates, because America’s most profitable exports (largely technology- and entertainment-related) come from there. When considering where to buy land,

2. Where to Buy Land – Rule #2: Near Industrial Centers.

There are two benefits to owning land near business and industrial centers.

First, successful industries are not static – they grow. Their survival depends on expansion, and businesses expand contagiously wherever they can in order to profit. Undeveloped land near industrial centers, therefore, becomes ever more valuable as industrial expansion creeps closer to its borders. By its nature, industry expands outward.

Second, people move near industrial centers, because they find jobs there. As suburban and residential areas surrounding industrial centers become more populous, people build outward and create larger residential areas. This way, more people can access the opportunities within urban centers (and, in turn, stimulate even more growth).

If you have ever shopped around for land, you’ve seen the difference in the value of an acre of undeveloped land and an acre of residential land, even if it is relatively rural. As people move in closer together and industrial centers expand, the land surrounding those areas skyrockets in value.

3. Where to Buy Land – Rule #3: In the Path of Development.

Finding land in the path of development means doing your research. A small, $20,000 land parcel can be more valuable than a $500,000 one – it all depends on learning where developers are planning to move next. A solar energy provider is expanding? That’s where to buy land. A suburban area is blossoming, and industry leaders are looking to move into the less populous sections? That’s where to buy land. Perhaps surprisingly, this kind of relevant information is available, and with patience and advice from an experienced investor, you can find land in the path of development to pay for your retirement or your children’s education.

Finally, remember that you don’t need to live nearby to know where to buy land – you just need to be well informed. Property in California belongs to people all over the country and the world. Don’t feel restricted by your address: anyone anywhere can discover where to buy land in the most lucrative areas.

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Top 10 Features of Land in the Path of Development

Investment gurus and real estate aficionados often talk about “land in the path of development.” But what does that phrase refer to? Land in the path of development is not just any land that is proximal to any major center of human activity. It is ideal land that is ready to grow. Here’s why.

1. The topography is right.

Land in the path of development is, first and foremost, level and buildable. Mountainous areas and swampland, no matter how near they may be to urban centers, are not ideal for development.

2. It has a water supply.

There need not be a well on the property, but land in the path of development must be easily irrigated or supplied with water. This water supply must be able to satisfy modern levels of water demand for years to come.

3. It must by accessible by rail, freeway, or air.

A road might not yet exist, but there must be a feasible way to put one there.

4. There must be a way to install growth-enabling utilities.

It is worthwhile to pay a speculator or an engineer for a professional opinion. Companies might be planning to expand into this area, but they make mistakes and run into anticipated barriers. Make sure that expansion into the land is realistic.

5. Education facilities – colleges and primary schools – must be in place.

While the land is being developed, the existing education system should be able to serve the region, at least until it can expand further.

6. It must be near a metropolis.

Urban centers grow and reach into more rural or undeveloped areas. Land in the path of development is near a center of financial and social activity, ideally a large metropolis.

7. Industries in the area should be planning growth.

When industries and commercial ventures do well, they grow, and they expand into the inexpensive land nearby. Research the businesses in the area. If they are planning to expand, the land you are considering is in the path of development.

8. Commercial and residential development should be on the move.

Small outward shifts – homes being built on the borders of suburbs, commercial storefronts moving into more residential areas – are also signs that land outside these areas is in the path of development.

9. Verifiable sources provide the information.

Do not trust speculative comments or residents’ best guesses. If trustworthy, legitimate sources can verify the aspects of the land that indicate its position in the path of development, you may consider investing in it.

10. Finally, master plans for a community should already be in place.

Is the city already planning to build streets and electrical systems beyond its existing borders? Are energy companies planning to move their services outward as well? If these community-building plans have been plotted, it’s a matter of time before the land in the path of development becomes developed land.

When we can identify these features, we consider an area “land in the path of development.” Ask us about land in the path of development in California today.

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5 Things to Expect from Land for Sale in Los Angeles County

When considering land baking in the LA area, prospective proprietors’ first few questions are often related to the nature of the land itself: what can I expect from land for sale in Los Angeles County? In this blog post, we’ll discuss realistic expectations and debunk a few of the common misconceptions regarding soon-to-be-developed land in this area.

1. Land for sale in Los Angeles County is not “virgin land.”

People who hear the phrase “land banking” might think that buying land in LA County is just hoping that some area of previously untouched land will be profitable. In fact, land banking is selecting land that has already been “scoped out” for development – entrepreneurs, energy companies, or other developers have already set their sights on the land, but they haven’t purchased it. In fact, over 23,000 acres have already been consolidated for solar development. Land for sale in Los Angeles County is not rough-hewn territory: it’s the area in which a community will naturally expand.

2. It’s not developed, either.

Pre-developed land for sale in Los Angeles County is expensive and hard to come by. In fact, land that is currently developed was often purchased by scrupulous land bankers years ago (when it was in the path of development). Most of the land for sale in Los Angeles County borders the most populated and developed areas, but it is available because it has not yet been developed. As the Los Angeles County population expands, the area of land available for purchase will shrink.

3. It is in the right place.

Los Angeles County is rich in human and resource potential, which has made it the tenth-largest economy in the world. It is the economic center of California, as it is the third-largest port system in the world (and the largest in America). As the world shrinks, the global influence of Los Angeles County grows; land for sale in Los Angeles County will become more valuable the more America engages with the economy of the rest of the world.

4. Land for sale in Los Angeles County is not isolated.

Some people feel that land for sale – especially inexpensive land – must be isolated or unusable. In fact, the map of Los Angeles County is filled with the headquarters of tech and entertainment companies as well as industrial businesses. Land in the path of development is dispersed within and between these centers of financial activity.

5. It can benefit you, even in small amounts.

You don’t have to buy thousands of acres to benefit; in fact, even students with just five thousand dollars can (and should) invest. Think of it this way: land that is now $3 per square foot, after development, may realistically be worth $300 per square foot. You’ve just multiplied your initial investment a hundred times. Don’t expect to “get rich quick” – wealth that lasts does take time – but you can expect land for sale in Los Angeles County to be a safe and profitable investment for your future.

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Land vs. Stocks

Almost everyone has wondered, “What’s the best place for my wealth? Land vs. stocks?” No one can make that decision for you, but going through the pros and cons methodically can help you make a decision. (Of course, if you’ve invested in the stock market recently, you may have learned about some of these the hard way).

Land vs. Stocks: Stock Market Pros

1. Own part of a business without investing your time in it.

Historically, business ownership is the most profitable type of asset ownership. Therefore, owning stock carries a high potential rate of return.

2. Stocks are more liquid than real estate investments.

If you choose to, you can liquidate your entire position in just one day; real estate takes much longer to sell.

3. It’s easy to borrow against your stocks.

If you are approved for margin borrowing, you can easily write a check and borrow against your investment account. Interest rates against stock debt are typically low.

Land vs. Stocks: Stock Market Cons

1. Stocks are inherently risky.

The high potential returns and high level of interest and activity in the stock market come with risks – companies go out of business, and stocks become worthless every day. Investing in the stock market will never be “safe.”

2. Stocks are volatile.

Along the same lines, stocks are volatile and are often affected by completely unanticipated factors. This volatility can create a stagnant or poorly performing portfolio, even if it is diversified.

Land vs. Stocks: Land Pros

1. Land almost never comes with unanticipated costs.

Stocks and developed real estate can both yield large losses: consider the irresponsible tenant or the hurricane damage to a residential building. Undeveloped land, however, usually comes with low property taxes – and that’s about it.

2. Land is tangible.

Owning land is owning something that won’t go anywhere. For this reason, even land that doesn’t increase in value guards against the depreciation of the dollar due to inflation.

3. It’s safer to invest in real estate with borrowed funds.

It is much easier and safer to invest in real estate using leverage; in fact, it’s often a good way to make money in real estate. This is a major difference when we consider land vs. stocks: using leverage to invest in the stock market makes the investment riskier; using leverage to invest in land may actually make the investment more sensible.

4. Land doesn’t lie.

Businesses can release faulty or incomplete information to manipulate stock prices, but you can learn the value and status of a plot of land by visiting and inspecting it. It is much more difficult to be defrauded when investing in land.

Land vs. Stocks: Land Cons

1. It takes work to invest in land.

If you buy on your own, buying land takes legwork. You must be willing to research the land, hire a speculator, and engage in a dialogue with the seller. Investing in the stock market takes a few mouse clicks. If you hire an experienced Land Banker, investing is easy!

2. Land does not usually appreciate astronomically.

Because land carries less risk, it is less likely to appreciate dramatically in value. It is also not likely to become worthless. Sometimes, a lucky investment makes stock market investors into overnight millionaires; profit related to land investment is slower and less dramatic. On the other hand, since you can’t create more land, the growth opportunities in high growth areas, can be substantial.

3. Land is not liquid.

Land is a long-term investment. For many, this is a good thing – after all, you can use leverage and loans to invest in land. However, selling land takes more time and effort than selling stocks does. It takes commitment and decisiveness to purchase a land parcel – you’ll be keeping it for some time.

As we have mentioned, no one else can determine the best investment for you. Now that you’re more informed on the costs and benefits of land vs. stocks, check out our other blog posts on the details of buying land in the path of development.

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How to Buy Land Cheap

Most people are more daunted by the prospect of buying land than they need to be. You can learn the basics of how to buy land cheap right here.

Step 1: Know what the land will be for.

Are you planning to build on the land or use it to diversify your portfolio? If you’re buying land in the path of development as an investment for your future, you aren’t restricted by where you live (or where you’d like to live) – instead, you should focus on the location of the land and how suitable it is for urban development.

Step 2: Save up.

Whether you invest with cash or IRA funds, land costs money. Even though we’re discussing how to buy land cheap, you need to come to the table with some funding. You won’t be able to retire on one $5,000 investment so consider diversifying your cash and IRA now.

Step 3: Decide where you’d like to buy.

At this point, you should look for general areas, not specific parcels. Do some research on the land, finding out which industries are nearby, what kind of bodies of water are on or near the land, and what the topography is like.

Step 4: Follow up.

Call the agent or seller and ask about the land. What kind of structures are already there? Why are they selling? Can the land support a septic system? Using this information, narrow your list down to properties you’d like to visit.

Step 5: Take a trip.

An important part of how to buy land cheap is making sure that the land is actually cheap. Sometimes, you won’t know whether the parcel you’re considering is valuable unless you visit the location, interview a few neighbors, and even camp out overnight (or just for a few hours). When you visit, take photos, draw maps, and do whatever you need to do to remember the land.

Step 6: Homework.

Once you’ve narrowed down your list by paying visits to a few properties, do your homework. Find out about the history of the area, the exact boundaries of the property, and the kind of development permits that might be necessary in the future. Verify the acreage by obtaining a survey or hiring a surveyor.

Step 7: Write a contract.

You don’t have to write your own contract, but you should make sure it’s tailored to your situation. If you do write your own contract (or work with one provided by the seller), always get a third party to look at it before you sign.

Step 8: Follow up and close.

After review your discloser report, etc., you’re ready to close the sale! The property is yours. Make the most of it. That’s all there is – now you know how to buy land cheap.

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Who can buy cheap land in California?

Don’t fall into the misconception that you need to be Donald Trump to buy cheap land in California (although Donald Trump did invest in undeveloped land in California). In fact, almost any middle-income investor can diversify by purchasing land. Is land banking in California right for you? Here, we will outline several groups of people who can easily buy and benefit from cheap land in California.

Singles

Singles with some money to invest can buy cheap land in California by creating a Roth IRA. Creating a Roth IRA is easier than it sounds. You can open a traditional IRA with a custodian of your choice and then simply convert the account to a Roth account. A Roth IRA allows you to pay taxes on the funds now (at the time of transfer). You are not taxed after you begin withdrawals, so a Roth IRA is often a better idea for singles: you pay taxes upfront on the investment, not the wealth you gain from it.

Families

Families, especially those looking to provide a college education for young children, can and should purchase cheap land in California as an investment. Even if some members of the family are almost ready to retire, the investment can benefit them, their children and their grandchildren over time. If a member of your family already has an IRA, your family doesn’t need cash in order to buy the land: you can use those funds. In this case, a Traditional IRA might be a better choice, especially if you are unable to claim the transferred funds as income.

Young People

Young people are ideal real estate investors, even though many don’t realize it. Every day, when people ask us about cheap land in California, we hear stories like, “When I was in growing up and in college, I saw my small town explode into the surrounding areas. It would have been nice to have invested in that land as a young person.” Young people – including working college students who have at least $5,000 to invest – have time on their side. With at least thirty or forty years ahead of them, during which they’ll be in the workforce, these people can wait to take advantage of development at its peak.

Business Owners

Business owners looking to retire comfortably don’t have to do what most of them do: invest in risky, sometimes underperforming stocks or bonds. Business owners are ideal land bankers whose investments can pay for some of their retirement expenses.

Ideal buyers of cheap land in California are regular people who look beyond the mainstream. Fed up with low savings account rates and volatile market investments, land bankers favor long-term, tangible assets that take time to grow. Land bankers don’t believe in get-rich-quick schemes; they believe that wealth comes from responsibility and informed decisiveness over time. If you find that these characteristics resonate with you, you might be an ideal land banker. Speak with us about investing in cheap land in California – you’ll be surprised by how much you don’t yet know.

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