Earn Free Land As An Investor: It's Not As Hard As You Think
BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq.,
InvestingInLand.com
Earning free land as a land investor or real estate developer isn't as
complicated or difficult as most people think. In fact, it's mostly common sense
when you think about the spread between wholesale and retail prices when buying
assets or anything else in volume for resale. One of the cornerstones of
my philosophy is that free land is the best kind of land you can ever own.
There is a great line in the famous Martin Scorsese movie GOODFELLAS that
perfectly sums up my feeling on free land. Even though Paulie the Gang Boss is a
rich man he loves eating free food wherever he goes because "free
food tastes so much better than food you have to pay for."
What is "Free Land"?
Free land to me is land that I can own without having any cash invested in
the position to own it. In other words, my investment basis in the asset is
zero. Put another way, I own the asset without an equity investment in it,
making my return-on-equity in that asset, no matter what the ultimate sale
price, infinite since anything divided by zero is infinity.
Two simple stories clearly illustrate this concept in the real world.
When I was a kid, I needed money but I was too young to have a job. Still, I
wanted cash to satisfy my two main desires in life which were buying things I
wanted to own and impressing beautiful girls in the neighborhood. (How little
times change....)
What I did to raise money was simple. I went to my local A&P supermarket
with my uncle and bought cases of El Cheapo generic soda for $2.00 per case of
24-cans and sold them on the corner of my road for 25-cents each. It was a busy
intersection where lots of homes had garage sales on weekends and it did get
mighty hot there in the summer. I'd sit on the corner with my cooler filled with
ice and soda under a big beach umbrella and make sales all day long.
The economics of this business were so simple even a ten-year old like me
could understand them. After eight sales, all my initial costs were recouped so
I could go buy more soda. This meant my profit came in the form of sixteen cans
of soda. Most of them I would sell for cash but some I gave out to pretty girls
named Rita, Laura, Patti, Judy, and others in my neighborhood making me a
popular guy when temperatures hit 90+. Others I drank myself, something my
parents frowned upon since soda was an item they just did not buy. But I had a
choice to take my profits on those sixteen cans of soda anyway I wanted, either
in cash, in conversation with very cute brunettes and blondes, or in the
ice-cool refreshment of contraband root beer and black cherry pop.
When I got older and discovered the stock market, I applied the same
logic.
Instead of building a stock portfolio by investing my limited capital in a
certain stock and waiting months or years for it to make me money, I decided to
increase the velocity on the few bucks I had and make myself money the way
professional gamblers do. THEY MAKE BIG BETS ONLY WHEN PLAYING WITH
THE HOUSE'S MONEY.
So, I'd buy 1,000 shares of Coca-Cola, for example, at $40 per share and
immediately put in a limit order to sell 900 shares at $45. (Or write some
covered calls with a strike price of $45, same concept.) Eventually I would be
sold out by the market and I'd be the proud owner of 100 shares of KO with no
money invested in the position. I paid $40,000 (1,000 x $40) and I received back
$40,500 (900 x $45). This means that my original capital was free to be deployed
again and again and again just seeking small movements in price that would earn
me stock as profits. Sometimes I sold these positions later for cash, other
times I kept them as long-term holdings (and still do), and quite often I'd
write covered calls against them and take the proceeds in additional cash.
Again, since the stock was pure profit with no investment, my options were
limitless. And there was NO RISK of loss. These stocks could fall in value to
zero and I would not lose a dime since I had no investment in them at all.
This same analysis above is even more true when investing in land.
Land is a Wholesaler's Paradise
There is an old real estate developer's saying which says:
"You buy land by the acre and sell it by the square
foot."
It is so true. In no other industry is there a greater spread between
wholesale and retail prices than in real estate development and land sales. Land
is purchased by the acre, the most common unit of measure, and sold (or leased)
by the square foot when entering into everything from construction contracts,
land leases, or simple land sales. How great is the spread between wholesale and
retail prices here? Most people have a hard time visualizing in their heads the
actual size of an acre of land. An acre is just about the size of a regulation
football field. (Technically, it's 9/10ths of one.) That is 4,840 square yards
or 43,560 square feet of land per acre. It is this spread between wholesale and
retail prices that makes land development such a profitable venture. But it gets
even better. Assume you are buying land in ten-acre or fifty-acre or 100+ acre
parcels and then selling it by the square foot. The wholesale/retail price
spread is astronomical.
Getting Free Land is Easy
It really doesn't take a PhD in rocket science to figure out that if you buy
ten-acres of land at a wholesale price (call that X per acre) and sell each of
those ten acres for 1.25X you will earn two free lots of land as profit. Plug in
your own numbers for X, you will make back your original purchase price with
eight lot sales every time. (A sample illustration for you. $260,000 buys you
ten acres of land, so X is $26,000. Sell eight lots at 1.25X or $32,500 and you
have back your original $260,000.)
This formula works when you are dealing with ten-acre lots. You can easily
figure out your own when dealing with lots of other sizes or according to how
many lots you actually want to keep as profit. Don't let the numbers confuse
you, this is not even high school algebra here. It's simply figuring out how
much your initial land purchase cost you, how many lots you want to keep, and
how many of the other lots have to sell so you can earn all your original money
back.
Now, is this a realistic way of buying and selling land? You bet! The example
above assumes 1.25X or a 25% markup from wholesale to retail price. You have to
be doing something very wrong as a land investor to not earn that in any number
of ways. If you followed the advice of my Investing in Land Home Study Course,
you should be earning that profit AT THE TIME OF PURCHASE on the spread between
the intrinsic value of the land and the purchase price you paid. In other words,
if you buy one dollar of land for eighty cents, you could easily sell that land
for one dollar instantly and earn your profit back with virtually no effort at
all. Plus my Course suggests many other methods for increasing the
wholesale/retail price spread by improving the land prior to sale, offering
seller financing, and so on.
What Do You Do With Free Land?
When you own free land, you have an huge number of options because time and
money are not against you as they are in a traditional land purchase. When you
buy and own land in the usual manner through either a cash purchase or financed
on a note, you have interest and/or principal payments to make and your cash is
tied up in an asset where the local rate of appreciation is probably the best
yield you can hope for under the circumstances. When you own free land, you have
no such worries since aside from property taxes and some minor insurance costs
you own your land free-and-clear. You can hold such land forever virtually
expense-free and without risking opportunity cost losses by not having your
capital available to strike when you want to buy other things. You also have no
investment risk in the property, for example, should a local government restrict
development on your land in the future, since (you guessed it) you have no
investment in the property. To put it bluntly, an owner of free land has all the
profits and none of the risk, a nice place to be as an investor.
The most valuable thing in the world to a land investor or real estate
developer is a building lot of any size owned free-and-clear. Why? Because you
have complete flexibility on how to maximize the profit from that land. Here are
just some of your options:
- Sell the land for cash in the future when you get a good offer
- Sell the land now on a note for a guaranteed monthly income
- Lease the land under a land lease for annual rental payments
- Develop the land using the land itself as collateral for the construction
financing
- Keep the land as a long-term investment and let your gain compound tax-free
- Enter into a joint venture development agreement with a partner for a
fractional interest in whatever improved real estate can be built on the land
using the free-and-clear land as your capital contribution to the venture
- Develop income sources from the land, everything from renting billboard
space to leasing cell phone tower pads to mobile home pads to campground space
and many, many others.
I hope you get the point here. That land is YOURS with no liens, no
debt, nothing attached to it but the annual property tax obligations that are
usually small in terms of relative value and can be offset by careful tax and
income planning.
Earning free land as a land investor isn't hard at all. All you have to do is
buy the right parcel of land and subdivide it into lots that can be sold for the
right price. This concept can make you rich in so many ways because your
original capital source is not tied up in a specific parcel of land for years
hoping future price appreciation will make you money. Your capital is free to
roam the earth seeking better deals while the free land profits of past deals
are providing you with current income, future appreciation profits, and
potentially rental income from a number of sources.
Even if your sole reason for wanting free land is nothing more than building
a home for yourself and your family, imagine walking into a bank for a
construction loan and saying:
"I own my land free-and-clear and now I want to use it and
my income as collateral to build a house on it."
Your banker's eyes will twinkle with delight and you will have a new best
friend on the loan committee.
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
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