Expert: Dennis Herman - 9/26/2008

Question
Hello Dennis,

I am interested in learning if one can make money in real estate by just buying land in different areas, maybe internationally even, in anticipation that the land might give good future increases in value. For example, a potential for industrial, residential, commercial, mining, minerals development or other types of development.

I'm just not into fixing up houses, renting, leasing office space, etc. Just buying land and hopefully reselling at a later profit.

Would you know of any books, CDs, courses, or other trade publications or materials where one could gain the knowledge of how to purchase land for future resale profits intelligently?

Thank you very much.

Sincerely,

Mike E.

Answer
Mike

Thank you for the question.  Investing in Real Estate can be summed up by one well known term.  It takes money to make money.  As a whole Real Estate has been a sound area for investment.  

One of the areas to watch out for is the never ending assortment of seminars and classes that are offered.  They may share a little bit of useful information but overall they are filled with clichés and empty promises.  

Real Estate investing largely depends upon local conditions.  It is always best to invest in a market you are familiar with.  If nothing else you will be more comfortable.  This will also allow you to become familiar with state and local laws and taxes that will effect your investment.  This is why it is wise to deal with a local Real Estate agent.

Land may look like a good investment but this is the best example of taking money to make money.  Buying farmland and subdividing is a major investment.  First of all you need to obtain the proper permits.  This requires surveys and plans.  I have heard of developers spending years just to obtain the proper permits.   Plans may have to be drawn up and revised many times before getting past the first phase of approval.  From there developers have to invest in water, sewers, roads, lighting, open areas and other requirements before they can even offer the first lot for sale.  This usually requires a large amount of available funds and financing.  

Commercial investing may include manufacturing, retail and residential rental units.  You have to know the business.  You have to know market prices and rent prices.  Most properties require improvements.  You have to determine the cost of improvements.  You have to check local requirements to know what inspections and fees you may have to pay.  

Most commercial property is priced based on income.  To familiarize yourself with commercial pricing look a a number of properties on paper.   Determine the income, usually the rent collected.  You will usually find a relationship between income and list price.  

List price is usually determined on 80% of purchase price being financed.  Add in property taxes, maintenance and allow for required improvements.

As an example use a four family unit with rents at $500 per month.  The income is $2000 per month.  Taxes are $4800 per year or $400 per  month.  Interest rates are 7% or $6.65 per thousand.  Maintenance is $100 per month.  
$2000 income - $400 taxes - $100 maintenance = $1500 net income / $6.65 = 225  
The $6.65 is cost per thousand so it is $225,000.  Since most sellers assume a 20% down payment they add this in.  $225,000 / .80 = $281,000 List price.

This may seem like the buyer will break even but you have to consider the fact that this is based upon fair market value today.  Historically real state prices increase and rents increase.  Profit is realized on future market conditions.  It is not much different than investing in the stock market.  

To determine if a property is a good investment look at the following factors:

Market value
How much you can afford.  Include monthly payments for mortgage, taxes, insurance and maintenance.
How much do you want to pay?
Determine fair market value.  Real Estate agents can supply you with a market study showing you a list of other properties for sale and prices of recently sold units.  
Determine what the future property value may be.  Add 2-3% per year to the present fair market value.  


For most people investing in a home may be the best investment.  Check the federal tax laws.  You do not have to pay taxes on the sale of a primary residential property if the profit is reinvested.  There are also time limits.  If you own the property and it is your primary residence beyond the required time limit you may be able to claim a profit tax free.  Check the tax laws.  They have a tendency to change.

When investing you need to build a team.  A local Real Estate agent is a good place to begin.  You will also need a lender.  If you are into investment property you may also need an attorney familiar with 1031 Exchanges.  
Seminars that promise quick wealth in real estate do not cover the details required to succeed.  You will still need a Real Estate agent to do a market study.  Because of the search capabilities available most agents can find properties much quicker.   You will still need a lender.  Consulting with an attorney is also a good place to begin.  Gathering the information is the first step in any wise investment.  


Thanks again for the question.