Land Banking As An Investment Strategy

Land Banking As An Investment Strategy
by Miguel de Arcos

“The major fortune in America has been made in land.” John D. Rockefeller.

I happen to strongly agree with Mr. Rockefeller and have seen many people make a lot of money with a land bank strategy when executed properly. In fact, a decendent real estate development company that still bears the Rockefeller name is currently a very well positioned client of mine. Conversely, I have also seen several investors lose money, so caution is always warranted. The trick is to use a qualified Advisor, find the right deal, project your timelines and expenses and pay cash. Most that failed were developers or land flippers that had over-leveraged the asset in an attempt to generate a quick buck. When the market stalled, they could no longer afford the annual carry costs. Let’s be clear; land banking is not flipping. It is an investment diversification strategy that if executed properly, can generate significant returns.

Land Banking is a term used by both individual investors and corporate land developers. It is the strategy of purchasing a parcel of land and holding (or banking it) it for typically five or more years for future sale or development. But remember, not all land parcels are created equally. Successful land banking requires planning and patience.

The process of Land Banking is divided into three equally important components: Planning Phase, Accumulation/Carry Phase and Disposition Phase.

The Planning Phase is based on the premise that the more time you have to wait, the better land banking will work for you. The reason is simple: the sooner you start implementing your strategy, the more time the “miracle of compound returns” has to work in your favor. Time is the most important component of any retirement strategy. You cannot buy or trade for more time. That means after careful thought and calculation of your goals, you need document the strategy to get there.

The next step in the Planning Phase is to answer the following questions in order to maximize your return:
• How many parcels should you buy?
• How frequently should I add new parcels to my portfolio?
• When do I plan to start selling the properties?
• What areas should be purchased and what areas avoided?
• Should I by raw land, zoned and entitled land or finished lots?

The answers depend on your personal time limitations, current cash reserves, and leverage capabilities.

The Accumulation/Carry Phase is exciting as you begin the search for your first parcel of land and then purchase it with available cash. You continue this same process over a pre-determined number of times then wait. Based on the property location and price, it may make sense to add a parcel to your portfolio every year, every two to three years, or still whenever you find the right bargain or opportunity. Remember to project your annual carry costs associated with the land. Costs such as real estate taxes, utilities, liability insurance, fencing and even possible association fees if you are buying lots in a subdivision. Make sure you have the reserve capital to pay for these items during your projected hold period.

Patient land bankers will consistently find good properties at good solid values. There is no need to overpay. Again time is on your side when you plan ahead. The Disposition Phase starts at the time you feel you have acheived your projected return on investment. This phase isn’t as simple as accumulating properties, but it definitely is more enjoyable as you start to reap the rewards of your strategic planning. If you don’t want to delay your payout, then put all of your properties on the market at once. Another option would be to start selling smaller chunks of your properties little by little to keep a small cash flow and pay for the assets overhead. The possible benefit of selling one property at a time is that market values could potentially go up. Your optimal goal would be to sell your property to an end user, such as a residential or commercial developer. If this happens, you will usually experience substantial appreciation in your property or individual finished lot prices.

Things which can happen to your property, over the years, to increase its value, could be, but are not limited to:
• Rezoned to a more valuable zoning (i.e. from agricultural to industrial).
• The zone density gets increased (i.e. your property goes from one house per acre to a zoning for three to four houses per acre).
• Paved roads and or utilities start moving closer to your property.
• New and major projects get announced near your property.
• Population growth which increases demand for land and increases land values.

The most important component in an area like Central Florida that determines future land values, lies in the answers to questions such as:
• Will the area continue to grow?
• Is it possible, beyond the year 2016, that Central Florida’s growth could explode?

In conclusion, no one has a crystal ball to look into the future with perfect clarity. What we do know is that Central Florida is one of the most desired place to live in the U.S. The population base is projected to double in the next 25 years and Central Florida is running out of developable area to grow due to physical, environmental and bureaucratic issues. The time to buy(any commodity) is at the bottom of the market when values are at their lowest. We are there. The time to sell is when demand outpaces supply. At our current pace, that will be 5 to 10 years. The first thing homebuilders will snatch up is finished lots, then zoned and entitled land. After that, they will fight over the remaining raw land much like they did back in the early 2000’s. Therefore, I believe select opportunities in Central Florida are perfect for land banking!

And remember, as Mark Twain once said “Buy land! They’re not making it anymore.”

P.S. Check out the new LinkedIn group Florida Finished Lot Exchange

All the best,

Miguel de Arcos
Sperry Van Ness Florida
Managing Director
www.CREAdvice.wordpress.com
www.twitter.com/MdeArcosCRE
www.facebook.com/svnParadigm

A special thanks to Ace Capital for allowing us to repurpose this information and contributing to this blog.

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