BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq., InvestingInLand.com

By far the most effective and profitable real estate investment strategy is to buy real estate properties, quickly add additional value to them, and then sell them to reap those fast added gains so the process can be repeated again and again each time with larger and more lucrative properties. This pyramiding approach was advocated by William Nickerson in his classic book, HOW I TURNED $1,000 INTO ONE MILLION IN REAL ESTATE IN MY SPARE TIME, probably the best real estate investing how-to book ever written.

The logic of this strategy is obvious. When you buy-and-hold rental properties for years, even decades, as some people advise, you are essentially riding market appreciation rates in your geographic area. Tenants will pay the holding costs of these properties (if you are lucky!) and they ultimate payoff comes years into the future when these properties have either been paid off and owned free-and-clear or when prices have risen in an area over time. Think of this style of investing as buying an index fund in the stock market. You earn what the market earns, nothing more and nothing less. Along the way, you pay to maintain, improve, lease, repair, and manage your asset which is slowly growing in value, or so you hope.

A pyramiding real estate investment strategy builds equity FAST by literally creating it. An investor using Nickerson's approach with rental properties or my approach with raw and vacant land does not wait for the market to give them additional equity. Instead, they use their own labor to quickly manufacture value through repairs, modernizations, and other improvements. This is the classic "fixer-upper" approach of buying a junker property and making it pretty with new paint and landscaping and then quickly selling to realize your profit. This is an active real estate investment strategy as opposed to the passive buy-and-hold approach. Here properties are treated as inventory in a business, bought wholesale and sold retail if you will, rather than merely held for the future appreciation or tax benefits they might possess.

My Problem with Rental Properties

I have nothing against buy-and-hold real estate. I own rentals and it is the only viable strategy for acquiring rental properties held for long term appreciation. Unfortunately most investors don't use my approach and doom themselves to mediocre market based appreciation rates calculated after-expenses and after-inflation, even with the extensive use of leverage.

I also have nothing against buying properties and fixing them up with physical repairs and improvements. I've done that too and continue to do it. Again, you just have to do it right and most investors don't.

But my major problem with rental properties is that most of the value of any traditional rental property is held in the form of a naturally depreciating asset. In other words, when you own an apartment building, an office tower, or a house used as a rental for tenants, the physical structure is a pile of wood, glass, tile, pipe, wires, and concrete that by its intrinsic natural nature is constantly decaying over time and needs CONSTANT repair, maintenance, and improvement just to retain its ever threatened value. Only the land component of a rental property does not depreciate or wear out. It is also the only part of any rental property that rises in value without additional investment into it. You don't have to paint or re-roof your land. It never needs new windows or elevator maintenance.

Buildings wear out. That's obvious. Weather, rust, erosion, age, tenant wear and tear, and all the rest give buildings a normal natural life. So owning a building means owning an asset whose value constantly falls towards zero even with regular and diligent repair and improvement. This last point should not be skipped over lightly. Property repair, improvement, and modernization cost BIG BIG MONEY. In other words, a building owner is spending money to slow down the rate of decay rather than create positive value. New paint, roofs, shingles, windows, and all the rest are futile efforts against nature's natural wrath and the evitable wear of tenants and time. It is very much like building a sand castle at the water's edge on a beach and hoping you can shovel away the tide.

By quickly improving and repairing a property in need of modernization or rehabilitation you avoid the long-term consequences of buy-and-hold ownership but there is still one problem with this quick selling strategy. Property repairs and improvements cost BIG MONEY. It is common sense that the worst shape the property is in, the more money it will cost to fix it up so this freshly renovated asset can compete against other newly constructed properties. The notion that most rehabs are just a coat of fresh paint and some new carpeting is more urban legend than reality. The most profitable rehabs require extensive gutting, major repairs, and improvements which take on years of deferred maintenance. These physical actions build value, yes. But they take time, cost money, especially in the form of holding costs, and nearly always run over budget. They are expensive because they are PHYSICAL IMPROVEMENTS TO PHYSICAL PROPERTIES. Wood, lumber, marble, tile, pipes, wires, glass, and all the rest cost a great deal because they are specialty manufactured products and require the expertise to install them correctly. The bottom line here is that repairing properties to sell them fast and so the new equity created can be pyramided into other deals makes logic sense but can be an expensive and costly approach.

Why Land is the Solution

As I mentioned earlier, only land does not depreciate. Land goes up in value due to its scarcity. Land rises in price due to its location. Land requires no physical repairs or improvements. So land as a buy-and-hold investment vehicle makes sense especially when the holding costs of this investment can be nil or paid for through the land itself. (These strategies are explained in depth in my Investing in Land Home Study Course and at great length during my Investing in Land Live Seminars.)

But what if you could "rehab" land and build quick value so you could sell this newly "improved" land and therefore pyramid your equity into larger deals just like the Nickerson model with rental properties?

YOU CAN!

And what if I tell you that you can "rehab" this land for little or no cost? In other words, instead of spending money rehabbing rental properties with new kitchens and bathrooms that cost large sums of capital you could build that same value with land FOR FREE or for a fraction of the comparable price.

YOU CAN!

And what if I tell you that you can earn these "rehab" profits almost INSTANTLY? Instead of taking days, weeks, or months to fix up a junker property to build new equity you can earn the same profits in a piece of land within hours. Why hold a rental property during the long rehab process when you can buy a piece of land, improve it, and then quickly resell it all within the span of a few short days at most?

I MAY SOUND LIKE A BROKEN RECORD BUT YES YOU CAN!

My Investing in Land Live Seminars concentrate on teaching these land "rehab" methods. One of my favorite is building instant equity through increasing plottage value.

What is Plottage Value?

Plottage value is merely the increase in land value achieved through the assembly of land. Put another way, a parcel of land is often more valuable as a whole than the sum of its parts. It is the opposite of subdivision where land is worth more for its parts than the whole.

A classic plottage value example is where there are two adjoining lots of land for sale. Each is identical in size and each can legally support a single family home. Each lot cost $20,000 to buy. However, when the lots are combined, or assembled, the resulting lot is large enough to be used as a commercial pad for a retail establishment like a convenience store. The combined lot, because it now has additional commercial value, would could sell for $70,000.

The plottage value of the combined lot is therefore $30,000, or $70,000 minus the $40,000 cost of the two lots. ($20,000 x 2)

What does it take to create this plottage value? Merely buying both lots and moving an imaginary line on a map down at the county courthouse or City Hall. Moving imaginary things can be done quickly and cheaply. Moving physical ones costs money. This is a very simple job for any competent real estate lawyer and the filing fees are almost nothing.

Realize that creating plottage value is NOT changing the permitted zoning on a property. That is also a common and very effective "paper" method for building equity in land but it can be very time consuming and expensive. It is also a technique I warn against because it is best left to those developers and investors with large bank accounts. But plottage value is achieved using the EXISTING zoning on a property. It is earned INSTANTLY when two lots or more lots are combined into one or more larger ones.

Opportunities for increasing the plottage value of land abound. They are more common than anyone thinks. Many times small and older adjoining properties are purchased and demolished to create one large lot for a new commercial development. In many areas McMansion development, or building a very large home on a small building lot in a neighborhood not known for large homes, can only be done by combining the building lots of two smaller homes. Land often sold at tax sales at literally pennies on the dollar can be combined with adjacent and adjoining lots to create larger and more development friendly ones. Many times legal building lots are inherently flawed, for example, a commercial lot that lacks sufficient parking spots for the permitted zoning use. Only through assemblage can this lot be fixed for development and the resulting plottage value belongs to the assembler.

Realize that plottage value is achieved INSTANTLY. When two separate lots are physically combined and the imaginary line on paper that separates them is erased, the value of the new larger lot increases IMMEDIATELY. There is no approval process, public hearings, permits, or contractor delays. Nothing physical needs to be done to the land. Not a spade of earth needs to be turned or a marker erected. Contrast the speed and extremely low cost (if any) achieved building plottage value with the traditional method of fixing up junker properties. No materials to buy, no workmen to hire (other than a lawyer, maybe), no laborious repairs that can take weeks or months, and no budget surprises.

Plottage value is not a new concept. Developers and land investors have been making money this way for CENTURIES. You can build plottage value in rural areas, in big cities (where assemblage is common), or in the suburbs. Quite often plottage value building investing techniques exploit poor subdivison strategies. Sometimes plottage value can be achieved by modernizing a land use that a municipality has already approved but the current landowners have not recognized. Plottage value is almost always created in the redevelopment of areas like slums or war zone housing. But it is also earned in the ritziest areas of downtown Manhattan and Beverly Hills. Wherever you live, you can earn plottage value through land assemblage.

The Bottom Line

As I said earlier, building plottage value is only one technique of what I call "paper rehabs" of land. This notion of quick and easy fix-ups to land is a central theme of my Investing in Land Live Seminars because they instantly build equity at little or no cost and earning money does not get much easier than that.

If you decide you are going to pyramid equity through many quick and repetitive real estate rehab projects, you've settled on the right real estate investment strategy. It is really the only one I can recommend. But your next choice is what type of real estate will you rehab? For me, the choice is obvious. It's the one type of real estate that does not depreciate in value, wear out, or require constant maintenance and improvement. Only land can be instantly rehabbed on paper without extensive physical repairs and their inherent expensive costs and delays. Large plottage value profits are just one of the many windfall gains possible when land is owned, improved, and quickly resold.

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