Flipping Land

Real Estate Investing Or Landlording?

Real estate investing is the classic wealth vehicle that has taken people from living hand to mouth to the pinnacle of wealth.

It’s the vehicle of choice because it’s accessible to all of us. Everone has a least rented a house or apartment, and most of us have bought a house. So knowing what it’s like to be renter or homeowner we have first hand knowledge of our customers when we set out to be real estate investors.

The classic real estate investing model is buy a bunch of houses, rent them out and in 30 years the mortgages will be paid off, the properties will have at least doubled in value, the rents will be twice what they were when you started … with no loan payment.

The goal sounds inspiring. Imagine having 10 properties you bought 30 years ago, each for $80,000, now be worth $350,000 apiece as a result of a average annual appreciation rate of 5%. You would have a portfolio worth about $3,500,000. Monthly rents, on the low side, of $1,200 per house would give you gross monthly rents of $12,000. After T&I you probably put $9,000 in your pocket.

I think you would agree this is an extremely modest goal, but what a payoff!!

What a payoff indeed … for those who actually stick with it. You see there’s a problem with the above scenario, and that is the early years are really tough.

Cashflow is slim, expenses are high, and most investors who take this on don’t make it through.

They run out of cash.

The short-term solution is to change your focus from buying and holding to quick-turning houses for cash. Quick-turning houses, getting them under contract super cheap and flipping them to another investor for $5-20,000 or more will take care of your cashflow needs today while you hold your rental properties for long term growth. This is great … money, cash!

But you are not out of the woods yet.

Your new short-term problem is management. If you are buying houses to hold for the long term you must be prepared for the fact that you will be managing them yourself, whether you take on that job as an individual or create a management company to do it. The fact remains that at some point your occupation will change from real estate investor to landlord.

And I’m afraid gentle reader, landlording is dirty, smelly business. One you do not want to be in.

There are worse things in life than being a landlord, most definitely, but that’s not why you got into real estate. You got into real estate because you want the big dollars. The really big ones. The ‘buy your own island’ big dollars, the ‘house on each continent’ kind of dollars. The nine figure net worth.

Didn’t you?

That net worth is available, in fact it’s waiting for you to claim it, but you won’t achieve the growth necessary to get there buying single family homes. As a growth vehicle they are very inefficient.

From a real estate investing standpoint the purpose of a single family home is to give you experience doing deals, and to take care of your immediate cash needs.

After you’ve paid off all your debts, have 12 months living expenses in the bank, and have a kitty of say, $100,000 to $200,000 there isn’t much further use for single family homes.

Unless, of course, you want to be a landlord.

As soon as you are debt free and have some starting capital you should move straight into buying apartments.

There is all kinds of leverage to be achieved by changing your wealth vehicle from single family houses to apartment buildings.

- from a value standpoint when buying apartments you are dealing with much bigger dollars, so as the years go by, you make more through appreciation.

- apartments have a much higher rent per square foot compared to houses, so property management can be brought in take management out of your hands in a cost effective manner.

- apartment buildings make sense from a business standpoint so it is no difficult to attract partner capital. – there is an abundance of apartment financing available from lenders up to 80% loan to value.

- there are many profit centers, like repairing units and increasing rents, filling vacancies, that can be capitalized on to capture upside value.

Also, because apartments are not reliant on your personal attention and can be effectively managed by property management companies you are not restricted to buying in your own local market.

By becoming aware of market cycles and tracking them closely, you can buy quality properties in any market in the US at the bottom of a cycle, and ride the appreciation to the top of the market, where you sell (or exchange out) and take huge profits.

Of course, providing you live in a market (like CA) that appreciates rapidly in an up cycle, you can achieve this with single family houses too. But which property would you rather have appreciating at 15% a year, a $300,000 house, or a $10,000,000 apartment building.

After 10 years a $300,000 house will turn into $1.33M. Nothing to sneeze at. But during the same 10 years in the same market a $10M apartment building will turn into $44.4M.

Which would you rather have?

It’s an easy choice, and one you simply need to make.

By: Ben Ker

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Increase or Decrease in Land Values?

The only truth in the expression “land will always appreciate in value because they’re not making any more of it” is found in the last 7 words! The finite supply of land does not come even close to guaranteeing that its value will increase over time. Supply is only one factor to be considered in estimating how much any real estate parcel is worth, and it’s not nearly as important as other issues when it comes to determining the value of land for development.

The land development valuation process begins with several questions. These questions focus on the most profitable use of the parcel, taking into account the current zoning and other legal restrictions and any physical limitations of the site. Value is tied to the “highest and best use” of a land parcel which is the most profitable use that’s legal, physically possible and economically feasible. The usefulness (utility) of a land parcel is the key.

Suppose there’s just one vacant land parcel, consisting of 20 acres, that’s available in an area. It has a great location and public utility lines are in the street. The seller is asking $2mil for it. How much is it really worth? You can’t answer that question until you know some additional facts, such as what uses and development densities are permitted under the zoning, how much of the land area can be developed, and if utility permits are available. In other words, you need to know how the parcel can be used and the intensity of the use that’s possible.

Lower Future $$$

Time can either work for or against land development values. It can bring changes that limit how a parcel can be used or impact its economic or physical feasibility for development. Local, county and state governments can enact laws that prohibit or suspend development for a specified period of time to allow a condition to be corrected or a change to be put into effect. These “moratoria” can last weeks, months or even years.

Suppose that 20-acre parcel is in an area that has been exploding with development. Builders have bought up virtually all of the available sewer permits. The local government imposes a moratorium and stops issuing any more sewer and building permits until the existing sewage treatment plant is expanded or a new plant is designed, built and put on line. Development could be suspended for years because only the properties that have sewer permits can be built out. The seller would have a hard time finding buyers once the moratorium went into effect because builders wouldn’t be interested in tying up resources on a property they couldn’t use for the foreseeable future.

The fact that this parcel is the only undeveloped property left in the entire area doesn’t mean that it’s worth big bucks now or even 10 years from now. If it’s zoned agricultural, for instance, the property is probably not going to appreciate measurably over time without a change to permit a profitable development use. Alternatively, the parcel might contain significant areas of natural resources that either couldn’t be disturbed or would increase cost to the point that any development wouldn’t be economically feasible. Time isn’t going to make these limitations disappear magically. Value won’t substantially increase with the passage of time.

Higher Future $$$

The 20-acre property could be worth big bucks if it’s in an area that’s been targeted for growth. A cross-county expressway might be in the works as the result of years of planning at the state and county levels, and the value of this property would spike if it is in the corridor of the proposed highway. The parcel could be worth a lot five years from now when the local government updated its master plan and decided that properties in this area should be zoned to permit more intensive development than agricultural. This change would promote plans for housing developments and major retail and commercial facilities (a regional mall, shopping centers, theme parks and office campuses), and public utilities would be extended or expanded to handle the growth that’s expected to occur in this area. Substantial appreciation would occur, not because of the passage of time, but because the highest and best use of the parcel had changed dramatically.

By: Nancy Chadwick

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