Back on March 11, 2008, I wrote a blog titled "A well-kept secret: Investing in Land Development". There, I gave four reasons why everyone should consider investing in land development. Here, I'm going to explain further about
why land development is one of the most lucrative investment vehicles of them all -- and that includes stocks, bonds, other real estate products, commodities, precious metals, etc. You name it.
Here goes....
Land development, also known as raw land development, is the process of converting raw or undeveloped land into land that can be used for a higher economic purpose -- i.e. it can be built upon. How does this magical transformation take place?
It's simple, but not easy. The developer obtains the necessary permits from the government and public agencies that are required to give permission to modify the land for a different purpose or use. It's a lot of red tape and can literally take years to complete depending on the size and scope of the project. In addition to being very time consuming, it can require a bunch of legal wrangling, a lot of politics, financial and management expertise and a great deal of patience.
Most developers are rookies and they usually fail because they don't have the relationships or experience needed to do this expertly. Many go into it with a great piece of property, in a great location, with a great idea for the property -- then fail because they couldn't get the necessary permits approved before they ran out of time and money.
The successful land developers are professional companies that do this all day every day. There are very few of these in the U.S., but these are the guys making all the money. They have the relationships with government officials, local business leaders, lenders and builders across the country. In a way, it's a 'good old boy network'. More importantly, they have
experience.So, how do these 'professional' land developers make their money? Well, simply put, they "create value". They do this by conducting a tsunami of research (that's a lot of research) about where population shifts are taking place, where communities are growing to, where jobs are being created.... you get the idea.
Once they have identified where the growth is going to take place (they look years into the future), they then search for raw undeveloped land or property in the path of this growth. Once they identify some raw land to their liking (it could be anywhere from a few acres to thousands of acres), the developer generates preliminary plans for this property in the form of a greater economic use. This could be a shopping mall, a master-planned residential community, an industrial complex, a golf course, etc.
The next step is to obtain the rights to the property. This is another area where non-professional developers often over-extend themselves and fail. The professional developer rarely will pay cash for a property up front and tie up his or her capital. Instead, they will employ modest deposits or 'right to purchase' contracts, etc. to obtain the rights to the property with little out of pocket expense. Meanwhile, a non-pro often doesn't have the knowledge or expertise in this area and they get in over their heads financially, causing them to ultimately run out of money and fail.
Next, the professional developer, will usually contact their network of builder relationships and present their preliminary plans (they might do this even before they obtain the rights to the property) and get a 'handshake' agreement to build-out the project once the government permits are obtained. And from there, the land development project goes into high gear -- meaning the permits and approvals are pursued full-time until completed.
To be clear, a true land developer does NOT build on the land. They simply (but not easily) obtain the approvals to do this. Sometimes, they will install the "infrastructure" - which could be the sewer and water mains, utilities, curbs & gutters, etc. -- but not always. Once they have obtained the permits and approvals, they will then sell the property to the builders and that's the end of their involvement in the project!
You may be thinking, that's it? How could that be so lucrative? Well I can assure you that it is. It is by far the most lucrative form of real estate. The reason is that it takes many years to become expert at what land developers do. I've already told you that most developers fail because they lack experience, so there is a lot of risk if you don't know what you're doing. So, the pros get paid very well for what they do because the builders have confidence that THEIR projects have a great opportunity for success.
One other thing.... Land development isn't susceptible to market fluctuations like residential real estate. Land developers don't rely on appreciation for their profit like builders and residential investors do! As I've illustrated above, the land developer CREATES value by obtaining approval to build on the previously undeveloped land:
A typical land development project increases the value of undeveloped land by 200-500% !! And it can be much greater. I consider that pretty darn lucrative don't you?
Now I hope you can see why any investor who can fog a mirror should consider land development as a component of their portfolio.
In the past, small investors like me couldn't participate in land development projects as investors. As I mentioned above, it's been a 'good old boy network' for many years among the few professionals in the business. So, you had to be know somebody to be 'invited' to invest and even then, you had to have millions to invest or you weren't worth their time.
But that's changed!Recently, a new type of investment structure was created that now allows smaller investors to participate in this very lucrative field. I sure do!
To learn more, click on the image below:
Until next time! Retirement Wiz (email me at: Johnha7@yahoo.com )
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