Land As An Investment: How Land Is An Asset Compared To Stocks, Bonds, Or Mutual Funds
BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq., InvestingInLand.com
I am often asked about land as an investment when compared to other common assets like stocks, bonds, mutual funds, and the like.
Is land a "good" investment? Is land "better" than stocks?
Questions like these really make little sense to me. It is sort of like going to a carpenter and poking around in his toolbox and asking:
Is a hammer a "good" tool? Is a screwdriver "better" than a saw?
A carpenter would answer these questions using common sense. A hammer is a "good" tool if you want to drive nails into a piece of wood. It is a lousy tool if you want to cut a piece of wood in half. Correspondingly, a screwdriver is a "better" tool if you want to remove a screw from a wall but an awful tool for driving nails or cutting wood.
The very same analysis is true of every asset class, including land.
Every type of asset has strengths and weaknesses. An investor needs to assess what they need from their investment portfolio and then select the assets that best meet that need. This is very traditional thinking on this subject. Retirees, for example, need assets that generate income for living expenses while younger investors are looking for tax-free compounded growth without income.
It is a common error for investors to first select the assets they want to own and then figure out how those assets can meet their needs. That is completely the reverse of what investors absolutely must do before investing a single dime.
First, decide WHY you need to invest.
Then, determine which assets best meet that WHY.
How is land as an investment? What can it offer an investor that stocks, bonds, or mutual funds cannot?
Most investments that you can list like stocks or bonds are great at PERPETUATING wealth. These are passive investments that rely upon the efforts of others to increase their value. Even if you own five million shares of Microsoft, for example, you can't tell Bill Gates what to do with the company. Making money with these assets means sitting back while you own them, collect the dividends and interest payments, and wait for market conditions, changes in interest rates, or other supply and demand considerations raises the value of whatever asset you own.
There are very few investments which excel at CREATING wealth. These are "hands-on" investments where you create equity with your own ideas, hard work, and business skill. Starting your own business (like Bill Gates did) is one such equity investment. Buying properties in need of repair, modernization, and improvement for fix-up and resale is another. Buying land for subdivision and development certainly qualifies too.
Any portfolio should have a balance between wealth perpetuating and wealth creating assets. Obviously the richer you are the more concerned you are with protecting your wealth than making more of it BUT NOT BY MUCH. Even the wealthiest people want more money. There is much truth in the old axiom that "You can never be too rich or too thin."
If you currently do not have as much wealth as you need or want, you need to focus your investing and portfolio building efforts on owning wealth creating assets.
Land is a wonderful investment for creating wealth. You can buy, sell, subdivide, and develop land and earn incredible yields over very short periods of time. Land also has its disadvantages, too. It is an illiquid investment, meaning there is no ready market for land like there is one for stocks or bonds. It also is an active investment that requires personal involvement and attention. If you are going to make money with land, you have to work at it. You can't just own land and wait for others or circumstances to raise the value of it for you.
All investors should own all classes of assets, including real estate and land. The only consideration is the mix. This diversification gives investors protection against any potential market downsides and offers portfolio stability. Bonds can provide a steady income, stocks long-term gains, and real estate short-term profits that can be used to buy the other two plus more real estate. Your individual situation now and in the future would determine the ratio of how much of each you should own.
Land is a poor investment for individuals who want to sit back and "clip coupons" (or collect interest payments off bonds while they play golf or tennis in the sun) and not actively manage their investments. I think land is a phenomenal investment that can make virtually anyone who wants to invest in it substantial money but that's the key. You need to want to invest in it first. You need to make the commitment to land investing and all the work and time it requires. If you do, you can make yourself a fortune. If you don't want to work at it, you are best advised to stick to stocks and bonds for their passive appeal.
Land is a great investment, in my opinion one of the best. But only if you want it to be for you and are willing to work at it. Otherwise, you won't be happy with land.
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