26 Jul The 3 Main Types of Land Investors | An Intro to Land Investing
Land buyers in general can be placed in one of two categories. First, there is land buyers who look to buy their dream property…build their cabin or house, and pass it along to their children when the time comes. These buyers are aware that they are adding a safe asset to their portfolio, but the main purpose of the purchase is for enjoyment. The second category of land buyers is land investors. They buy property with the primary goal of growing their net worth, either short or long term. This article will address the latter type of land buyers…those looking at land buying primarily as an investment.
Over the past century, recreational and farmland have undoubtedly been some of the most fruitful investments. Dating back to the mid 1900s, there has only been one seven year period where land valuations have dropped. No other scenario would produce a decrease in value. Even though farmland has seen a small decrease in value lately, double digit growth has been a commonplace in the agriculture industry. Additionally, farmland has some of the best and most consistent income returns in the investment world. Still, land investing remains a mystery to most of the general population.
Much like buying stocks or flipping houses, there are several different options when it comes to land investing. This article is going to address what we see as the most common types of land investing.
1) Long Term Buy and Hold
Warren Buffet once said…
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Land is very similar in this regard. Long term buy and hold investors look for the highest quality farms…knowing that there will always be a demand for great land. Generally, this is determined by the quality of the soils. We will address how soils are rated in a later article, but generally speaking, soils are given a number grade that correlates to its ability to produce a crop. The better the grade, the more likely a farm is to produce a consistent crop over a long term span. These buyers are eying a safe consistent return. We relate these purchases to buying stocks like Google, Amazon, Apple, etc… known commodities that have produced steady growth. The additional advantage to purchasing tillable farms like this is that they produce a great annual income return. There are many different options when it comes to renting out tillable land, but the general concept is that the tenant farmer pays the owner on a per tillable acre basis for the right to farm those acres. Most land investors look at this equation as a return on investment. Currently, buyers looking to purchase grade A farmland are looking to return in the 2.5-3% range…meaning if a buyer purchases a farm for $1,000,000, he/she should expect to receive $25,000-$30,000 annually from the tenant farmer. To invest in this manner, a buyer doesn’t necessarily need to have much knowledge in farmland. There are farm managers that will manage your farm for a percentage of the return. Or you can just align yourself with an experience land broker who will guide you in the right direction. Ownership of farms like these is pretty easy and maintenance free. Typically, the tenant farmer is responsible for maintaining the farm…mowing road frontage, waterways, etc… We think of these investments just like a stock, with the enormous added benefit of being a hard asset – there is actually a product (land) at the end of the money.
2) Land Developer
This type of land investing requires some greater knowledge in land or a land broker that you trust. This is where we believe we separate ourselves from our competition. Think of this type of investing as flipping houses. A successful home flipper can see through many things that typical home buyers cant…bad paint colors, outdated flooring, etc… They can identify homes that can be upgraded at minimal costs…resulting in a house that will appeal to a much broader audience at a much higher price. Land Developers operate much in the same way. In fact, this is how I got my start in the land industry…working for a company that invested exclusively in this manner. Quick and inexpensive updates for properties include improvements such as trails, converting pasture to tillable acres, planting fruit trees, mowing unattractive overgrowth, and in some cases building lakes or wetlands. Similarly to home flipping, the general concept is to take a piece of property that is currently unattractive to most land buyers and shining it up through improvement and labor projects. The ultimate goal is to create a more appealing property that will become attractive to a broader audience, and in turn demanding a higher price. Again, this type of investing typically results from a relationship with an experienced land broker who has a hands on approach. This type of investing is for those that are a bit more aggressive. It has inherent risks that are not common with buy and hold investors. The time table for land developers rarely exceeds two years. Just like the stock market, many things can happen in this short of time span that effect the land market. Another potential downfall of this type of land investing is going overboard on the improvements. It is very easy to change paths from financial return to personal projects that seem fun. Typically, the most successful land developers are the ones who develop a detailed plan with their broker, and stick to the plan in a non-emotional manner. When everything lines up correctly though, the short term return can be much greater. One huge benefit to this type of investing is that it provides the owner with some recreational personal enjoyment. Properties that are often targeted include lakes, atv trails, hunting opportunities, etc… The time of ownership can some great fun for the owner and his/her friends and family.
3) Purchase and Divide
Another method for recent land investors is to purchase a property and divide it into smaller tracts. This has been extremely successful for several reasons. First and foremost, you must have a basic understanding of how buyers valuate property. We will go into this more in depth in a later article, but in general, each portion of a property needs to be looked at in isolation. In general the most common elements of a property are tillable acres, timber acres, water acres, remainder acres, and physical improvements. The driving element that often makes this strategy successful is that different type of buyers put different values on each of these elements. For example, many farmers see timber land as 100% worthless. That is to say that they put a valuation of $0 for any acre that is not farmland. So ultimately, he/she would pay the same amount for the following properties…
1) 40 acres 100% tillable
2) 48 acre with 40 acres tillable
By now, I’m sure you are starting to see the appeal of dividing a property as a seller. If you could divide the non tillable land off and sell it to a hunter, who puts a high value on timber acres, you are maximizing your return. This is the case with each and every element of a property. Different buyers value each element of a property differently. So the general concept is the divide the property into tracts tracts that will bring the most money.
Another analogy that we use with this type of investing is corporate restructuring…where companies legally separate departments of the company into individual entities. This allows the corporations to better track the financial position of each entity. In addition, it also makes each entity more appealing to buyers. It becomes more palatable because of the size in general and they only have to buy the one division that is appealing to them. Much like this, land dividing works when you can identify properties where the sum of the parts is greater than the whole. In most scenarios, this involves bigger tracts that are pretty diverse. You divide off the tillable tract to bring top dollar from the farmers/investors. You divide off the timber ground with a little low quality tillable land for the hunter. You divide of a lake with a homesite for the weekend recreational buyer. Much like the land developer investing, this requires a deep relationship with an experienced land broker. It involves a detailed plan that must be executed. It involves some additional up front costs like surveying the property. However, it can be an extremely profitable venture. It is one that we have seen incredible success with here at LandCo. It has allowed us to develop several trusted relationships with influential land investors. Our past success has led us to new clients and has really contributed to the growth of our company.
One huge benefit of this strategy is that in general, smaller tracts demand higher prices. This stems from greater competition. The buyer pool of $200,000 properties is bigger than the buyer pool for $1,000,000 properties. A bigger buyer pool means more competition, which leads to higher prices. So ultimately, the goal of this strategy is to identify properties where the sum of the parts is greater than the whole. It is then divided into tracts to maximize the value of each of those parts…then marketed to a bigger buyer pool with increases the demand.
Much like the land developer method, this type of investment also comes with some great recreational opportunities. As stated, properties that generally fit the mold for this type of investing are very diverse…tillable, lakes, timber, etc… so they offer a ton of fun stuff – hunting, fishing, atvs, etc… In fact, many of our investors target only division opportunities that align with their interests. For example, many investors like to sneak out on the weekends to do some fishing with their family. So it is their goal to not only identify properties that suit this strategies, but also afford them the opportunity to fish. As many of our clients say, it allows them to “enjoy their investments”.
We at LandCo love to see new people get in involved in land investing. We don’t believe that the land investment industry should be some sort of secret society. We take great pride and passion in bringing new investors into the industry. There are several types of investing and each is suited towards different personalities. We do not try to steer anyone towards a specific type, we simply like to keep our clients informed. At LandCo, we truly believe this is what separates us from our competition. It is a niche that requires a different level of land expertise and customer service. We give land investors a level of customer service that they deserve…one that elevates past a broker/buyer relationship. Ultimately, we see these relationships as partnerships. I would guess that roughly half of our sales come from clients who approach land investing in one of these three manners. If you have any questions or would like to learn more, don’t hesitate to reach out to us. Land Investing is not a one time thing, it is a relationship that requires trust. We would love to start that relationship with you today so we may do business with you in the future.