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Is 100% Annual Return On Investments
Possible With Low Risk Land Investments?
By Chris Anderson, PhD
In last week’s article, we
discussed how substantial profits could be made by
investing where baby boomers may want to relocate or buy
a second home. This seemed to confuse readers since
they were thinking that our web site is about
preconstruction and preconstruction to them means buying
condos…… In this article, I hope to broaden your
Unlike many people, I have a very broad definition of
preconstruction investing which can be summarized as
Preconstruction investing is the pursuit of real
estate projects that offer the opportunity to ride
rapidly increasing prices over time without the need
to put tenants in place to defray costs. Since no
tenants are involved, this opens the possibility to
making investments in locales that are far removed from
where you live.
If you adopt this point of view, then a whole world of
“alternative” preconstruction investments opens up to
you. Today, we are going to look at one specific type
of investment: investing in developing land projects
where baby boomers might want to retire or own a second
Before we get into the specifics, let’s talk about what
all investors want:
Good investment returns; and
Minimal use of their capital;
Quite frankly, these 3 reasons are what got me into
preconstruction real estate investing in the first
place. Now let’s see how these might be achieved on a
purchase of investment land that we believe to be VERY
desirable to baby boomers.
Suppose we are considering the purchase of a piece of
property for speculation of future returns. If, like
me, you believe in the impact of the baby boomers, then
you will do 3 things to control your risk:
Carefully select a land project where you are
solidly convinced that baby boomers will want to possess
it at any costs;
Make sure that you believe that baby boomers will
be AWARE of this project in the future due to somebody’s
Manage your finances and investment portfolio so
that if you are wrong and you do take a loss, it is not
catastrophic to you.
For the time being, let’s assume that you have met these
conditions on a project and now you are ready to analyze
your returns and your use of capital.
Now we have to resort to hard analysis. Let’s look at
the following ASSUMPTIONS:
The land project is assumed to increase at least
25%/Yr in price;
We plan on holding the land for 2 yrs and then
$200,000 purchase price with $5,000 in closing
Annual taxes/association fees of 1%.
Let’s take a look at three cases in a spreadsheet format
to how things might turn out under this scenario.
Case 1: 10% down payment, interest only, all payments
made by BUYER.
Case 2: 10% down payment, interest only, all payments
made by SELLER.
Case 3: 5% down payment, interest only, all payments
made by SELLER.
Cases 2 and 3 require a bit of explanation. There are
some early stage land projects available where the
developer will take a percentage of your purchase price
and escrow an amount that will make your payments for a
period of time---- typically 2 years. This means that
during your 2 year hold, you would only pay taxes and
association fees. To enter this in the spreadsheet,
we just show a 0% rate during the holding period.
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If you scroll down, you can review the performance of
each case. It may surprise you that even under Case 1,
where you paid in a total of $48,600 out of pocket, you
still see a return on investment of 127%! That equates
to 51% annual return on investment. Compare that to
what your friendly banker is giving you in your CD.
For many investors, beginning or not, they would prefer
not to have to put in that much money so let’s look at
Case 2 where the developer has escrowed 2 years worth of
payments. In this case, we invest a total of $29,000
with a total, out the door profit before taxes of
$81,625 thus providing a total return of 281%. If you
then extend that to Case 3, where only 5% down is
required, then the return goes off the charts.
The biggest variable here is our assumed appreciation
rate: we choose 25%. Of course this depends on the
general market, the local market, the project, etc. and
NOBODY can predict this going forward. So what happens
as the assumed level goes from -5%/Yr to 50%/Yr which
hopefully will be a good bracket. The chart below shows
In the very near future, there will be some
opportunities on “preconstruction” land similar to what
is described here! If this type of investment may be of
interest to you, then your job becomes deciding these 3
Is it low risk for YOU?
Is it good investment returns for YOU?
Is it an acceptable use of YOUR capital?
To assist, we will try to present enough information
about the project/locale to for you to assess your own
risk and projected growth rates: what you assume may be
quite different from what I assume and that is ok. To
assist with the other pieces, we have provided a copy of
the spreadsheet used in this article so you can make
your own assumptions and analysis.
Click Here to get the
spreadsheet at no cost.