"This is the best money I've spent so far trying to attract qualified investors. I've attended several VC and Angel Investor events over the past year to attract investors and this site has attracted the most relevant and qualified investors so far. Thanks! ~ James Fitzgerald - ChainStar USA"
Posted on March 1, 2019 @ 04:50:00 PM by Paul Meagher
This week me and my wife finalized the purchase of 9 acres of remote vacant land. Here is an aerial photo of the parcel we purchased.
You can generally purchase remote vacant land much more cheaply than land in suburban areas, unless the land has valuable agricultural/forestry resources on it, has particularly nice views or is improved in significant ways.
One question you might ask about vacant land is how much it might appreciate without doing anything to improve it. We purchased the land for $9,000 but it came to $11,390 after sales taxes and lawyers fees. I will be able to claim the sales tax back ($1,350) as part of our registered farm partnership so an accurate final acquisition cost is $11,390 - $1350 = $10,040.
Let us assume that 5 years later I was able to sell the land for $15,000. The sales taxes I collect on that amount are irrelevant to calculating my rate of return as I have to return the collected taxes to the government. I would, however, have to deduct my lawyers fees from $15,000 to calculate my rate of return. Over a 5 year period I assume the lawyers fees would rise from $1,040 to $1,400 so the final amount I might make from this transaction is $15,000 - $1,400 = $13,600. Obviously, lawyers fees can play an important role in determining the amount of profit you make on a transaction this small.
Finally, let us assume that land taxes are $100 a year so over 5 years that amounts to $500 to hold onto the property. To compute my rate of return I need to subtract the land taxes as well: $13,600 - $500 = $13,100. An important thing to note is that as soon as you start improving your land your land taxes may go up, especially if you add a building to it. This is why some remote land investors specifically look for vacant land to invest in.
So $13,100 - $10,040 = $3,060 is the overall profit in a passive investment scenario (ignoring sales broker costs if you can do a private sale like I did to purchase this property). If we divide $3,060 by the 5 years we held the land that amounts to $612 per year in profit. If we divide $612 by the original investment of $10,040 that amounts to a 6 percent annual return on our original investment amount. Not great perhaps, but better than putting it in a savings account earning very little interest. If you don't get the profit you are looking for, maybe you will have to hold it a bit longer in the hopes that you will get the return you want.
If you leave vacant land alone it may appreciate or depreciate in value. If it was an open field, and it grows up in alders and low value wood, perhaps the land value will depreciate. If the land was a growing forest, then after 5 years of holding it may have marketable wood that can be used or sold by the new land owner. Maybe that takes 8 years to happen. Often it will be real estate values in nearby areas that are more populated, and the scarcity of available land to meed demand, that will have the most impact on the price you can ask.
My intention is not to hold this particular piece of property as a passive investment but before spending money to improve the land it might be worth trying to estimate its value as a passive investment so you can decide if your improvements are going to generate a significantly higher return or whether you are just spending alot of time and money for very little gain. There is risk in developing vacant land because there may be a good reason why it is vacant. In this case, road access in the winter is very challenging as snow plows don't service this road in winter unless the only person who lives on this road is staying in his cabin. He takes off after xmas. There used to be many more people living in this area 100 years ago but it was too remote for them so they gradually moved away.
On the other hand, we aren't making any more land, there are some spectacular views around here (i.e., view of lake on one side, ocean on the other), real estate values are increasing substantially in nearby rural towns, and people may want to get back to the land and enjoy greater privacy and freedom during warmer parts of the year. Maybe 3 acre lots could each be sold for $15,000+ a piece if they were surveyed, deeded and moderately improved?
The key to this particular land investment for me was that the path of the power line runs through the length of the property next to the road. Delivery of electricity to potential lots could be provided relatively cheaply. Access to electric power in remote vacant land can be expensive to get and you might need to explore some off-grid option to provide power. Here the power lines run along the road and are physically on the property. Another consideration is that we have already invested in farm equipment that can be deployed to help improve the land (e.g., tractor, bush hog, plow, rototiller, chain saw, brush cutter saw, wagon, etc..). Frankly the farming hasn't been much of a revenue generator for us so far which is ok because losses from the farm enterprise can be used to offset income in other areas to reduce income taxes. It is my hope that one way to get the farm to be financially sustainable will be to make improvements on this vacant land so people can live there. Last year we purchased the wild blueberry fields on the other side of the road. I hope to be able to spend time on this remote site managing wild lowbush blueberries and improving this 9 acre lot. That is my definition of a vacation.
One approach to land development on remote vacant land is to use Permaculture ideas and techniques. For example, sector mapping
involves figuring out how various energies move through your landscape: the path of the sun in summer and winter, the prevailing wind
directions in summer and winter, how water flows, how wildlife enters and leaves, where the fire danger is highest, where your vistas are located, etc. The idea is that mapping these flows so you understand them better will help you to optimize any design you eventually impose upon the landscape.
On Youtube, Oregon State University ECampus regularly publishes Permaculture videos as part of their online and offline Permaculture Design curriculum. In this video, Andrew Millison offers a great instructional video on how understanding the slope of your landscape can be used in the design of energy efficient and agriculturally productive settlements.
Hope this blog provides some insight into some of the challenges of remote vacant land investing. This type of real estate investing is not talked about as much as other types but it could be a good way to get people back on the land again. It can be a good investment under the right circumstances. Spending time in remote landscapes also helps to improve physical and mental health and gives you a sense of privacy and freedom that is hard to put a price tag on.
Connecting California Entrepreneurs and Investors.
Notice: The California Investment Network is owned by
Dealfow Solutions Ltd. The California Investment Network is part
of a network of sites, the Dealflow Investment Network, that provides a platform
for startups and existing businesses to connect with a combined pool of potential
funders. Dealflow Solutions Ltd. is not a registered broker or dealer and
does not offer investment advice or advice on the raising of capital. The
California Investment Network does not provide direct funding or make any
recommendations or suggestions to an investor to invest in a particular company.
It does not take part in the negotiations or execution of any transaction or deal.
The California Investment Network does not purchase, sell, negotiate,
execute, take possession or is compensated by securities in any way, or at any time,
nor is it permitted through our platform. We are not an equity crowdfunding platform
or portal. Entrepreneurs and Accredited Investors who wish to use the California Investment Network
are hereby warned that engaging in private fundraising and funding activities can expose you to
a high risk of fraud, monetary loss, and regulatory scrutiny and to proceed with caution
and professional guidance at all times.