Raw land is unimproved property; it has no utilities, sewers, streets or structures and usually must be cleared. Buying raw land within your IRA can be a great venture or a miserable one. Keep in mind that raw land is NOT income producing, meaning your IRA must be able to carry the payments, interest, taxes and (if you choose) development costs. If you buy in the path of progress with the intention of selling in five years, carefully estimate the costs associated with holding it for that time period. The path of progress often experiences slow downs or different directions so there is no guarantee. With careful research and planning though, your IRA will realize tremendous gains.
Factors to Consider
Negative aspects of raw land acquisition:
- Usually the land does not generate any income while you pay the principle, interest, taxes and costs of development so it may have negative cash flow.
- Tax advantages are scanty as land cannot be depreciated.
- Generally, raw land is considered a long-term investment before gains can be realized.
- Risk of loss on resale can occur if you choose poorly, fail to evaluate and negotiate properly, the economy slips or various other unforeseen events occur.
- It is difficult to obtain traditional financing on or borrow against accrued equity.
Benefits to buying and selling raw land:
- Land has the potential to experience tremendous appreciation if bought in the path of growth, or if a higher and better use can be achieved.
- Owner financing can often be obtained through the seller at below-market rates.
- Subdividing can create added value and provide for immediate returns.
- Privacy and pride of ownership can provide a secure feeling to the holder.
Good Land versus Bad Land
Composition—Swamp or marshland is the worst to buy because of government restrictions that protect habitats. Land with barren rock will increase development costs.
Soil—Loamy soil (which consists of a balanced mixture of clay, sand and some organic matter and appears rich and dark in color) is considered ideal for most purposes. Avoid hard cracking ground when dry and sticky soil when wet. Warning! Check with your state offices for the presence of expansive soils as it will crack foundations in the most insidious ways.
Grade— Most often flat land is the least expensive to develop and the most desired for building purposes. Many people are literally driven to the hills. Granted the views can be spectacular but roads, utilities, water, sewer, and foundations, can add 25-30% to building costs alone, further adding to this already expensive proposition. When considering going vertical, an 8-degree slope is about the limit. Plots with trees, a view, rectangular in shape, a gentle slope and a good location are most often preferred, and streams can boost values by 100% in some cases.
Determining the Value
Using the appraiser's standard view of estimating value can give us some clues, so let's look at what appraisers do!
- Site size and shape, represented by frontage, width and depth.
- Corner influence equals visibility for commercial, or privacy for residential.
- Plottage, has assembly or combining of parcels been accomplished.
- How much land is excess or surplus; surplus has less value than what is required.
- Topography: Land's contour, grading, natural drainage, soil, view and usefulness
- Utilities: Sewers, drinking water, natural gas, electric, telephone, cable, etc.
- Site improvements: Landscaping, fences, gutters, walks, drives and irrigation
- Accessibility: Parking, location, streets, alleys, connecting roads and highways
- Environment: Climate, adequate water supply, air quality, streams, rivers, lakes, oceans and the absence of any hazardous materials
Developing
Transforming raw land into a habitable piece of property by bringing in sewer, water and power takes time and considerable effort, but can lead to vast gains.
Do-it-yourself— If you have a small amount of money to invest and looking for a project, this may be the way to go. Otherwise known as sweat equity, you can make way for improvements yourself by completing the manual labor. Developing involves hiring licensed and bonded sub-contractors to do the technical work. Permits are also required.
Hiring a contractor—You will have more time to seek and close deals if you leave the work to a contractor. That company is now responsible for planning and completing the entire job.
Buying with a group—Developing larger plots and subdividing is a popular method to produce more income. Finding a group of people with the same goals allows you to pool your money and take a percentage of the profit equivalent to your investment for your retirement account.
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