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.