How To Identify High-Growth Regions for Land Investments

So you want to take a vacation to some place new and exciting. I’ll bet you’ll spend quite a bit of time researching the area: where to stay, where to eat, how to get around, what’s going on in the area. Would you spend the same amount of time investigating an investment opportunity that could provide you with a comfortable retirement years down the road?
The key – well, one key anyway – to successful pre-developed land investing is identifying high growth areas before the growth arrives. As discussed in Money Doesn’t Grow on Trees, this land banking strategy is known as being in the path of growth.
But this is a big country, with a lot of open land. How do you know where the path of growth is? Of course you can never know with 100% certainty, but there are a series of fundamental characteristics you should look for in any land banking area. These are the qualities that keep the growth moving down a path toward your land.

1. Population centers. The best place to start looking for growth is, quite simply, where the people are now. These are dense population centers that, in order to keep growing, need to expand beyond their current boundaries.
2. Affordable housing. When people can’t afford to buy a home inside the population center they move to the more affordable outskirts. Ideally you’d like to find an outlying area with housing prices roughly half of average housing costs closer in.
3. Level, usable land. This is the land that gets developed first. Hilly, mountainous terrain, or land with other natural barriers to building, is usually the last to be developed, if at all.
4. Available water supply. It’s been said that water is the oil of the 21st century. You need water to support a growing population and, if it’s not there, the people won’t be either.
5. Transportation accessibility: freeway, train, air. Look for existing transportation infrastructure and serious plans for expansion. You may find a good deal in the middle of nowhere, and your great grandchildren will thank you for it.
6. Adequate utilities. In addition to water a growing population needs electricity, gas, telephones, cable, etc. The cost of developing this infrastructure is tremendous so utility companies forecast their budgets well into the future.
7. Educational system. New growth is generally led by families, and families won’t go where they can’t educate their children. Look for well supported primary education system as well as advanced education and training opportunities. Also, look for plans to build new schools over the next 5 to 10 years.
8. Proximity to large, metropolitan areas. New population centers don’t just spring up in the desert. (Las Vegas aside.) They radiate out from existing metropolitan areas. Ideally you should be within commuting distance – say 100 miles or so.
9. Existing and planned industrial and commercial base. Jobs. Jobs attract people, simple as that.
10. Existing and planned residential and commercial development. In real estate we say that retail follows rooftops. Builders won’t go into an area unless their research tells them there is demand.
11. Master plans for community. While we live in a free economy, it is ultimately the local government agencies that decide what will be built, when and where. Most communities are required to have a master plan for growth looking out at least ten to twenty years.
12. Authoritative population projections. There are actually people who spend their lives studying population growth. They’re called demographers and you can find their work at the census bureau, which provides population and economic data on the state and local levels as well. In addition, many local government agencies and economic associations produce well researched growth projections.

These are the principal characteristics to consider in land banking. If a region is missing the mark on a number of these points I would put it in the “not in my lifetime” category. Making sure these fundamentals are in place will definitely help you get into the right ballpark. A closer look at the actual stadium (i.e., which land parcels to consider) will be addressed in our next land banking discussion.

Pre-developed land is a powerful long-term investment vehicle.

Real estate is changing rapidly. Today it is no longer the realm of a select few wealthy investors, but has become an accepted asset class with a variety of solutions to meet the individual needs of each investor. These needs vary depending on the investor’s risk profile, time horizon, yield requirements, knowledge and experience, and available capital, among other factors. The investment options range from office towers, to the mortgages secured by that tower, to the land it sits on (or will eventually sit on.)

I’ll start my musings from the ground up (and ask your forgiveness for the bad pun.) Land goes through four basic phases in the development life cycle, and there are investment opportunities in every phase, each with its own risks and return potential. For the long-term investor, particularly if you’re investing with your self-directed IRA, strategically chosen pre-developed land (phase I) can be one of the best ways to diversify your portfolio and improve returns.

Pre-developed land in the path of growth can provide some of the highest potential returns. For the long-term or retirement investor there can be additional benefits to a pre-developed land investment:

• No tenants to deal with.
• No ongoing maintenance requirements.
• Little to no insurance requirements.
• Limited supply (can’t make more land.)

This investment strategy is often referred to as land banking – buying land and holding it for future development. Immeasurable wealth has been created by people who had the vision and the patience to execute this strategy. The exploding population in already crowded regions places continued demand for land development, and presents the owners of that land with an enviable profit-making opportunity that will never again exist. Once the land is built out the original opportunity is gone.

Land in the path of growth is a common phrase in the industry today, but the operative piece is “path of growth.” Defining and identifying path of growth is the key to profitable land banking as that’s where the largest asset appreciation resides. (Unless your investing for your great great grandchildren.) In my next article I’ll discuss my top-down approach to identifying quality land banking opportunities.