Land investing or land flipping is a speculative type of investing that involves buying land with an intent to hold the property until it sells for a profit. Sometimes you can flip the land quickly for a profit. Other times, as was the case for the properties I bought back in the early 2000s, it can take decades. This is the danger of land investing. But is there a better way to invest in land that doesn’t involve as much risk to your finances? Read the article to find out!
It was 2004.
The real estate market in Florida was red hot.
I remember that time well. I was buying raw land with no money down and flipping it less than 6 months later for a six-figure profit.
It was easy to make money back then. Really easy.
Until eventually, the music stopped.
Starting in 2006, things started to slow down. By 2007 the real estate market collapsed.
The land I bought for $125,000, I couldn’t even sell for $5,000.
And land values still haven’t recovered. The property I bought for $125,000 is only worth $88,000 today, nearly two decades later!
This is the danger of land investing.
Now before diving in, I wanted to point out that this article isn’t to say that land investing is good or bad. The purpose of this article is to point out the dangers of land investing for those who are thinking about venturing into this asset class. Ultimately, there are ways to make money with land investing, assuming you know what you’re doing and you don’t get too unlucky (more on that below).
[Caption: This is what a vacant lot looks like. This one cost me $125,000 back in 2004.]
What is Land Investing?
Land investing is buying land with an intent to hold it until you can sell it for a profit. It’s also referred to as land flipping. Sometimes the hold period is short like it was back in the early 2000s. But most of the time it’s a longer holding period.
Land investing isn’t the same thing as land development.
Land development is the process of improving the land so it’s worth more. It’s like how we force appreciation on our rental properties. A subdivision is an example of land development. A developer buys the land, gets the permits for putting in roads and utilities, then sells the developed land to a builder for a profit.
The dangers of land investing
The problem with land investing is that it’s very speculative in nature. It’s like gambling. You are betting that the value of the property goes up.
The problem is, sometimes it can take a long time. Like over two decades long.
And even if you wait that long, there’s no guarantee that the land will appreciate in value.
The other problem is that it’s easy for inexperienced investors to get caught up in the hysteria.
Like gambling, there is an addictive nature to speculation.
People get caught up in the dream of a large payout.
This is what it felt like before the 2007 crash. Newbie investors would hear stories of others’ successes and they’d want to dive right in, sometimes risking their financial future and without regard for the potential downsides.
We’re seeing a similar level of excitement about land investing brewing in different investment circles.
Is this yet another repeat of the early 2000s?
Hopefully not and if you’re reading this article and you can avoid the allure of speculation, then at least you won’t get caught up in it.
The benefits of experience
While I was one of those inexperienced investors who got caught in the hysteria, I’m a much better investor because of it.
It formed the foundation of our real estate course, Zero to Freedom. We teach you the right way to invest: to base your investment decisions on the numbers and to fully evaluate and mitigate risk.
We also teach you the mindset for investing. We know that all investing carries risk. Sometimes things happen that are out of your control.
This happened to one of our students when her house collapsed. Yes, one day it was standing and the next day it was as flat as a pancake. One of our mentors lost millions of dollars to an endangered species.
Things will happen. It’s inevitable. But the question is, do you have the mindset to keep going despite the challenges?
I could have quit after my experience investing during The Great Recession. Many did. However, we wouldn’t be where we are now if I never got back into real estate.
There’s one other important benefit of experience.
Experience teaches you to not get caught up in the hype. To be diligent about evaluating the potential downsides of an investment.
And these lessons run deep so you don’t forget it.
If you haven’t experienced a recession or a major mistake, then you are going to be more prone to get overly enthusiastic about an investment opportunity or forget to fully evaluate the risks.
When you are inexperienced – you haven’t learned the lessons of major recessions. We haven’t had a major recession for over 15 years so not many know what it feels like.
It’s like the scene in Good Will Hunting. Will was extremely intelligent but he was book smart. When the character played by Robin Williams asked him, “What does the Sistine Chapel smell like?” Will was stumped. He was stumped because he never experienced it. Bottom line, experience matters.
Is There a Better Way?
This is not to say that all land investing is bad.
There are definitely fortunes to be made with land investing.
But the question is, how? How do you do it in a way that doesn’t involve all of the risks.
One way is to establish a strong foundation of cashflowing properties. Imagine if your properties are generating hundreds of thousands a year in cashflow. Do you think you could afford to buy a piece of land that costs a few thousands a year in mortgage payments, taxes and insurance? And would there be a lot of risk?
The benefit of this approach is that you can not only afford it, there’s not a lot of risk to your overall portfolio. While the land itself might not pan out, it doesn’t hurt you financially.
Now if it does hit and you make millions like you dreamed of, then you did it in a way that is far better than the person who starts out with a bunch of land investments that don’t cashflow.
As our mentor says, “land eats three meals a day.” What this means is that you have to keep reaching in your pocket to pay for the land. It’s not at all self-sufficient.
So before you invest in that land deal, be sure to have the funds to feed it.
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