Archive for March, 2014

What is a Farmland Investor?

farmland investor, like a hedge fund investor, can make large sums of money if he is extremely knowledgeable and lucky, or he can get wiped out if he doesn’t know what he is doing and is unlucky.

Buying land for farming, at the right price and terms, is just the initial step in a very complex investment scheme. After acquiring the land, the right crop must be planted, operating expenses must be controlled, the weather must cooperate, and the price for the crop (which is really nothing more than a commodity) at harvest must be favorable. If all of these “moving parts” (many of which are beyond the control of the farmer) aren’t lined up favorable, the losses can be staggering.

Suppose a farmer paid $7,000 per acre for 500 acres of irrigated farm land, and during a five year period made a profit of $200 per acre one year, broke even the second year, and lost $300 per acre, $100 per acre, and $500 per acre for the last three years. Simple mathematics reveals he would be down, over the five year period, the equivalent of $700 per acre. This means his 500 acre farm would have had to increase in value 10% just for him to break even.

So if farming relies, in part, on land increasing in value in order to show a profit, why not simply invest in cheap land and forget all the expenses and complex operations required in farming? Instead of investing $3.5 million for an improved 500 acre irrigated farm that requires additional capital and operations, wouldn’t it make more sense to use the same $3.5 million to purchase 14,000 acres of cheap, dry prairie land for $250 per acre? Thus, at the end of five years, if the 14,000 acres increased in value by 10%, the $350,000 increase would be pure profit (and not required just to “break even”)!

Anyone interested in becoming a farmland investor might be well served to at least analyze the merits and simplicity of investing in large tracts of cheap land instead!

Note: This article is not intended as an in-depth review of farming operations and profit potentials; rather it is a reminder that farming operations always require greater capital and greater financial risks than does the activity of simply owning cheap land and relying on time and inflation to cause higher values.

For the farmland investor to review alternative investments, click here.

The Correlation between Inflation and Cheap Land

What is the correlation between inflation and cheap acreage? Inflation is basically the result of more and more paper currency being printed, that competes for the same existing goods and services. Land, however, can’t be created or printed. Thus, you have the case where more and more paper currency causes it to become worth less and less, while land, because it is in finite supply, becomes worth more and more.

The above hypothesis can easily be tested by reviewing historical data. Let’s take the case of a person who lived in the United States 75 years ago, in the year 1936. This was during Franklin D. Roosevelt’s presidency, and a few years before World War II. In 1936, houses sold for $3,900, new cars for $700, a loaf of bread for eight cents, and gasoline for 10 cents, and the average wage was around $1,700 annually.

Now, let’s assume that this person inherited, in that year of 1936, the sum of $10,000 cash. Let’s further assume that this person wanted to pass the money down to his heirs, to be paid out 75 years later, in the year 2011. But the person couldn’t decide whether he wanted to pass down the $10,000 in cash or buy the cheapest 10,000 acres he could find in the nation and, instead, pass the acreage down to his heirs. In 1936, he could easily have found cheap land for $1 per acre, and thus he could have acquired 10,000 acres for the $10,000.

Would the heirs be better off receiving the $10,000 cash or the 10,000 acres?

Had they received the $10,000 in cash, it wouldn’t have been much of an inheritance. That sum of money in 2011 didn’t have nearly the same purchasing power that it possessed in 1936. In fact, by 2011, the $10,000 would barely support a family’s meager lifestyle for 90 days.

The 10,000 acres, however, would be an entirely different matter. Depending on where the land was located, the 10,000 acres would be worth anywhere from $2.5 million to $10 million, or more!

In summary, the above clearly demonstrates the direct correlation between inflation and cheap land. Through the years, paper currency always depreciates in value, and finite assets like land always appreciate in value.

To view cheap land that can be a hedge against inflation, please click here.

Land as an Investment is Always Profitable

Land as an investment can be a marvelous and amazing process to behold. In the beginning, there is no crystal ball that can predict with absolute certainty what the future will bring. Consider the following two examples—both ultimately profitable—that began almost 100 years ago.

In 1917, Utah rancher Thomas L. Williams purchased 140 acres north of Las Vegas for $8 per acre and subdivided 100 of the acres in 79 lots. This was the beginning of the town of North Las Vegas. Williams eventually sold all of his lots to residents who liked the idea of no taxes, no building restrictions, and no license requirements. With the coming of Prohibition in the 1920s, he sold quite a few lots to bootleggers who built their homes over basements containing stills.

When the Hoover Dam was constructed during the 1930s, it brought new prosperity to the region. After World War II, in the late 1940s, the gambling industry began to develop. Thereafter, Las Vegas and its surrounding suburbs developed into a multibillion-dollar mecca of glittering resorts, attracting many millions of tourists annually.

And what would Mr. Williams’ 140 acres, which he purchased for $1,120 back in 1917, be worth today? Try around $50 million.

The second example would be a 50,000-acre ranch located in the middle of Nevada, also purchased in the same year of 1917 for $1 per acre. Unlike Mr. Williams’ 140 acres next to Las Vegas, during the ensuing years, absolutely nothing developed near this ranch. Very few new residents arrived, no casinos, shopping centers, or housing developments were built, no new roads were constructed—in fact, the ranch is still being used today to graze cattle, just as it was back in 1917.

So what is the 50,000 acres worth today? It is worth around $10 million.

What is the moral of this little analogy? Mainly that land as an investment—assuming it is purchased cheaply enough and held long enough—will always be profitable. The only variable will be the magnitude of profitability.

To view land as an investment, please click here.

The Best Hedge Against Inflation

In broad economic terms, inflation is the devaluing of purchasing power due to an increased influx of printed currency. A hedge is an investment opportunity that can help shield a person against such economic instability. Typically, hedges are things that have a finite supply. Stocks, bonds, automobiles, machinery, equipment, and even food, would make poor hedges, because all of these items can readily be reproduced and can easily become perishable. On the other hand, an asset such as land would make the best hedge against inflation because no one can make any more of it, and it isn’t perishable.

Since the founding of our nation 235 years ago, raw land, as a dependable financial asset, has withstood the test of time. As a prime example, let’s suppose Ben Franklin, in 1776, had placed $10,000 of freshly printed currency in one safe deposit box in Philadelphia; and in another safe deposit box he place a deed for 10,000 acres that were located somewhere in the “wilderness.” Today, the $10,000 in 1776 currency would be practically worthless (inflation over 235 years would have destroyed most of its buying power), yet the 10,000 acres, depending on their exact location, would be worth millions of dollars.

Small residential rental properties (single-family homes and duplexes) can also serve as an investment hedge, but there are many potential liabilities involved. Tenants can cause serious damage; maintenance can be quite high; property taxes and insurance can eat into profits; and in a serious recession tenants can move out and the income ceases.

In summary, perhaps the very best hedge against inflation would be to simply acquire a large tract of cheaply price land in the “boondocks” and wait, wait and wait!

To view land that would serve as the best hedge against inflation, please click here.

Value of Land Per Acre Today

It is quite interesting to see how the value of land per acre today, in the spring of 2014, stacks up with other prices. We are referring to the lowest priced land in the nation, land that can be purchased for around $400 per acre. A quick review of this topic reveals some interesting comparisons and helps focus on the issue of relativity.

First, how have we arrived at the value of land per acre being $400? Let’s take just one small example. Forty-acres in Wyoming might be priced at $16,000—which calculates to $400 per acre. But a person would have to purchase the entire 40 acres in order to realize the $400 per acre price. In other words, a person couldn’t just elect to have one acre carved out of the 40 acres. So the following analogies would apply if 40 people formed a syndicate and purchased the 40 acres (where, in effect, each person would then own an undivided interest in one acre of land).

Let’s start with the price of gold, which currently is a little over $1,600 per ounce. As opposed to an ounce of gold, wouldn’t you rather own four acres of land (that measures over 400 feet by 400 feet)?

A fancy briefcase can easily cost $400. But wouldn’t you prefer to own an acre of land for $400 instead of the briefcase?

A pair of men’s shoes can cost $400. But wouldn’t you rather own an acre of land for $400 instead of the shoes?

A fine dinner and a couple bottles of wine for four people can easily cost $400. Wouldn’t you rather own an acre of land for $400 instead of the meal?

I don’t know what the price of gold will be in 10 years (but prices could be subject to some form of government controls), but I do know that in 10 years the briefcase and the men’s shoes will probably be worn out and thrown away. I also know that in 10 years the fine dinner will have long since been forgotten. Finally, I know that the value of land per acre, which is $400 today, will be substantially higher 10 years in the future!

Click here to see properties offered with a great value of land per acre.

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Cheap Acreage Investments

Cheap acreage investments have very little to do with what the land is zoned for, what it can be used for, where it is located, whether there are utilities available or not, whether crops can be grown or not, whether water is available or not, or even if there is a road to the property or not. Instead, these investments have everything to do with price, price and price!

There are countless historical examples of farmland with irrigation systems that was purchased for what appeared to be excellent bargains. Yet crop prices collapsed, demand slackened, operating costs increased, and banks were forced to foreclose on the property. There are also many examples of fully improved lots bordering growing cities that suffered huge price depreciations when an economic recession hit, zoning wasn’t approved, and financing for development dried up. Finally, consider income properties (such as apartments, office buildings, and shopping centers) that were purchased for fair prices, but eventually were foreclosed on because of poor management, excessive maintenance expenses, and vacating tenants.

Conversely, the lowest priced land that can be purchased in the United States of America at any particular time will always, and invariably, be worth more money at some future date. There can be no example shown in the history of the United States where this isn’t true! But the key is to buy the land cheaply enough and to hold it for a long enough period of time. Again, notice that this has nothing to do with where the land is located, the use of the land, the zoning of the land, improvements on the land, or roads to the land—rather, it has everything to do with the initial purchase price of the land!

All investment theories should be tested against solid historical facts. In this case, that becomes quite simple. When the United States was founded in 1776, land was valued in the “wild, unexplored West” (the region extending from the original 13 colonies to the Pacific Ocean—none of which was even part of the new nation at that time) for as little as five cents per acre. Obviously, this land wasn’t improved and had no utilities, no water, and no roads. Now, 235 years later, much of this same land is still unimproved, with no utilities, no water, and no roads. Yet today, it is very difficult to find any of this land for under $250 per acre. So without anything whatsoever being done to the land, it increased in value from five cents per acre to $250 per acre—an increase of 5,000 times!

Fortunately, people interested in cheap acreage investments don’t have to wait 235 years for a payday. But they do have to buy the land cheaply enough, and then relax and wait for at least a few years. There are ways to make money faster, but few that are safer or more predictable!

To view cheap acreage investments, please click here.

Hedge Against Hyperinflation

Inflation and hyperinflation is basically the same thing; it’s just a matter of degree. Inflation has been occurring in the United States since the founding of the nation in 1776. One example of hyperinflation would be what happened in Germany in the 1920s, when a cup of coffee cost the equivalent of $100. Today, it is important for everyone to understand how to hedge against hyperinflation.

First, let’s review the history of inflation in the United States over the last 50 years. Fifty years ago, in 1961, $1,000 purchased $1,000 worth of goods and services. Today, however, according to the U.S. Bureau of Labor Statistics, it takes $7,500 to purchase the same goods and services that $1,000 purchased 50 years ago. That means that over the last 50 years, the U.S. dollar has lost approximately 87% of its purchasing power.

What caused the U.S. dollar to depreciate so much in value? This inflation occurred because the federal government printed new U.S. dollars faster that the corresponding growth of new goods and services.

How can a person hedge against hyperinflation? Simply by exchanging dollars—that the federal government will forever be printing more of—for finite assets, such as land, that can’t be reproduced. For a simple example, assume a person has $50,000 in the bank. Every time the federal government prints more dollars, the existing dollars in circulation become worth less and less. Conversely, let’s assume the person exchanged the $50,000 in cash for 1,000 acres of land. In this case, every time the federal government prints new dollars, the 1,000 acres become worth more and more (because land is a fixed supply and the government couldn’t create new land in the same equivalent supply as it created new dollars).

Every American citizen needs to understand how to hedge against hyperinflation—especially during a time when the federal government is committed to printing and spending trillions of new dollars (in order to service a huge and growing national debt)!

TTo view land that can be used as a hedge against hyperinflation, please click here.

Is Cheap Land a Good Investment?

The answer to that question—“Is cheap land a good investment?”—would depend on your definition of a “good investment.” If your definition is an investment that will double or triple in two or three years, then the answer would be “No.” On the other hand, if your definition is an investment that predictably and safely always increases in future years, then the answer would be a resounding “Yes.”

Let’s summarize four different assets that many people invest in.

  1. Stocks and bonds can go up, can go down, and sometimes can go bankrupt, wiping out all values.
  2. Income real estate (apartment buildings, offices, industrial parks, etc.) can be subject to vacancy factors and ongoing maintenance expenses.
  3. Bank CDs are insured by the federal government, and therefore are safe as to the face value of the asset—however, due to inflation, cash always depreciates in “buying power” through the years.
  4. Land can go up, it can go down, but it remains forever, and historically, it’s always worth more money in future years.

History has proven time and time again that cheap land is not only a good investment, but if it is purchased cheaply enough and held long enough—it can become a fantastic investment!

To view cheap land investment opportunities, please click here.

What are the Benefits of having Land Investments?

Land investments are significantly different from stock market investments in several very important aspects.

  • In order to purchase $50,000 worth of stock, you usually have to put up $50,000 in cash. Yet a person can often purchase $50,000 worth of land by making a down payment of only 20% ($10,000) and financing the balance.
  • A stock investor’s percentage of ownership in a public company can be diluted if the Board of Directors elects to issue more shares of stock. Conversely, a land investor retains 100% ownership of the land.
  • Stock owners are subject to the quality of the management running the company: good management can result in a higher stock price, and poor management can cause a stock price to sink. Landowners are not at the mercy of management (since there is none)—they simply wait and rely on time (or some other positive development) to increase values.
  • During the last 100 years, quite a few large, prominent Wall Street companies “crashed” and went out of business. However, every single acre of land is still here today and is worth more money than it was 100 years ago.

Historically people have made huge sums of money with both stocks and land. People have also lost large sums of money with both stocks and land. The glaring difference, however, is that if a land investor can afford to hold onto a piece of land for a long enough period of time, then the value, at some point in the future, will always be higher than the original value. But that luxury doesn’t exist with stock in a company that went bankrupt and was liquidated.

Land investments are one of the very few assets guaranteed to still be here in the future, and one that is assured to eventually have a higher value.

To view land investment opportunities, please click here.

5 Popular Land Investment Strategies

Through the years, many land investment strategies have been utilized in an attempt to pick winning land deals and maximize profit potentials. Following are a few of the more popular strategies employed.

  1. Growth Patterns—analyze growth patterns of large and expanding cities like Phoenix, Albuquerque, San Diego, Los Angeles, Las Vegas, etc. Then acquire land in the path of the strongest direction of growth and wait. If the timing is good, this strategy can work; if not, it can fail.
  2. Pre-Development—A slight modification of the above. Find an existing housing development in any small city and purchase the adjoining land. Wait for developers, seeking to build more homes, to knock on your door. If the timing is good, this strategy can work; if not, it can fail.
  3. Entitlement Deals—Locate a suitable tract of land, apply for a zone change, put in utilities, build roads, and develop lots for residential purposes. Then sell the lots to small builders. If the timing is good, this strategy can work; if not, it can fail.
  4. Creating New Cities—Acquire thousands of acres and build an entirely new city, starting from scratch. In the 1950s, Nate Mendelsohn acquired 80,000 acres located in the desert 50 miles north of Los Angeles and began developing California City. Another example would be Lake Las Vegas. In the early 1990s, development began on this new city located about 30 miles outside Las Vegas. This strategy takes many years and millions of dollars to unfold. And almost invariably, the original developers don’t make any money.
  5. Just Buy the Cheapest Land Available—Ignore location, growth patterns, and don’t spend any money developing anything. Be governed solely by the lowest possible per-acre price you can find. Buy a large tract of extremely cheap per-acre land, and simply hang on to it for a long enough time. Unlike the other four land investment strategies outlined above, it is virtually impossible to lose money with this strategy.

In summary, of the land investment strategies outlined above, the last one is the simplest, has the fewest “moving parts,” and is the only one that relies on nothing but the passage of time!

To view land investment strategies based solely on cheap land, please click here.