10 Key Factors That Determine the Growth Path of
Pre-developed Land

Ryan Wegman, Land Banking Specialist with Ace Capital Group

 

It's common knowledge that the majority of millionaires come from investing in real estate. If you've been around long enough or up all night you have seen the infomercials claiming vast fortunes in foreclosures, tax liens and deeds, and probates.  You have undoubtedly seen in the main stream media the making of an epidemic of the "housing bubble" and the fold of the sub-prime lending market.

This wasn't an unexpected event or random acts that led to these catastrophic events.  If you are a home owner or a landlord faced with these challenges I deeply sympathize with you. We've seen the growth and we've seen the demise of the industry and the one fact that stands out is no one ever talks about where the wealth truly comes from.

Looking at real estate we can divide it up into three sections "undeveloped raw land"; "pre-developed land"; and "developed property" and compare the costs and profits among them. Undeveloped land has little cost and low profit potential. Developed property has a high cost and again little profit left when you factor in all of the costs for development.

Last but not least we have the most profitable property which is pre-developed land. This unique property has all of the profit potential built right in. It's the gap between undeveloped and developed real estate. The hidden profit center lying directly in the path of growth. Growth then in turn drives the value of the real property up.  To best illustrate the benefits of land investing, I have provided two scenarios below followed by the key elements for a profitable growth path. 

Pre-development Land Investing Examples

Let's go back in time to an area we all know as Silicon Valley. San Jose, CA 1976 where you could have purchased a nice 3 bedroom 2 bath home for $25,000. Fast forward to today, what is that house worth?

In today’s market it sells for  $600,000 to $750,000 -- a nice 25X to 30X return on your initial investment. Now then to the pre-development stage of real estate we go back to the same time frame in San Jose where just 5 to 7 miles outside of that nice house where vacant orchard land was selling for $8,000 to $24,000 per acre.

You chose the cheapest land at $8,000 per acre and you purchased three acres for a grand total of $24,000. Again let's fast forward to today in San Jose. Do you have any idea what those vacant parcels of land are selling for? If you can find them.

They sell for $1,500,000 per acre or more. Since you had three you’re now sitting on $4,500,000 to $5,000,000, a nice 180X return on your initial investment. That's 18,000% over 30 years a nice average of 600% per year.

Now then scenario two let's just say you are a new parent and you want only the best for your new child. So you decide to start saving for their college education. You take and sock away a huge $25,000 investment. Where should you invest for the safest and most aggressive growth?

For College Education

What if you had invested $25,000 for your child's education 18 years ago?
A CD yielding a 5% return per year*	$60,165
A Mutual Fund yielding a 10% return per year*	$138,998
California Land yielding a 30% return per year*	$2,811,385

*Note: These are for illustration purposes only and do not reflect any specific returns.

4 Key Factors Determine Growth and 10 Key Elements

So now coming back to the strategy of long term appreciation you need to understand why pre-development stages of real estate are essential for growth as long as they meet certain criteria. There are four key factors that determine growth and create long-term appreciation in real estate:

• population density
• the local economy and the job market
• half price or affordable housing
• and the 10 key indicators of a growth path

10 Key Indicators of a Growth Path

All 10 of the following key elements of the growth path must be present in order for success to be assured and risk of principal to be minimized or eliminated.

1. The pre-developed stage of real estate must be level, buildable and usable.
2. There must be an abundant and accessible water supply for today’s current requirement as well as for the next 40 to 50 years.
3. The area must be accessible by freeway, train or air.
4. You must have adequate utilities for future growth.
5. There must be an educational system in place from primary schools through college and universities.
6. You must have a close proximity to a large metropolis.
7. There must also be planned industry and commerce to continue job growth and the tax base.
8. Continued growth of commercial and residential developments.
9. All sources of information should come from authoritative sources not just a random tip from the grape vine.
10. Last but not least there must be master plans for a community in place (streets, roads, sewer, electric and gas).

With all of these indicators in place you can rest assured that long term capital appreciation will prevail. If you miss just one of the key elements you can rest assured this is a recipe for disaster. Learn the science and engineering of a great deal right from the start and avoid the disappointment later. Land banking is a proven formula" that provides safe, high growth, long term capital appreciation.”

 

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