Posts Tagged ‘buying cheap land’

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.

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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.

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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!

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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!

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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.

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Benefits of Investing in Cheap Land!

The opportunity to invest in cheap land in America should be thoroughly and seriously explored. Cheap land is a very safe asset, and one that is certain to increase in value in future years. Cheap land can’t be stolen, destroyed by fire, outdated by technology or reproduced. All that is required for cheap land to increase in value is inflation and a greater population, both of which are inevitable. Following are just two historical examples to consider.

In the years between 1901 and 1907, the California Development Corporation attempted to build a water canal from the Colorado River westward into California’s Imperial Valley. The goal was to provide a source of irrigation and turn this dry, desolate and uninhabitable area into a subdivision of lush farms. Initially started by private promoters, the project was eventually taken over by the Southern Pacific Railroad with federal support promised by President Teddy Roosevelt. The United States Government owned most of the region, and was offering land for sale at $1.25 per acre. The project failed after thousands of acres were sold and millions of dollars lost, and in 1909, the California Development Corporation was liquidated.

So over the last 100 years, what has happened to land prices in the Imperial Valley? Much of the land is still without water, still desolate and uninhabitable, yet it is very difficult today to find land in the Imperial Valley for less than $1,000 per acre.

For a more recent example of people who decided to invest in cheap land, consider the corridor along Interstate Highway 80 in Wyoming, between the towns of Rock Springs and Rawlins. Local residents refer to the region as “barren and worthless.” Most of the cheap land in this part of the state is in the checkerboard area (ownership of alternate sections divided between the federal government and private owners), which eliminates development potential. Known as the Red Desert, the area has no power, water, utilities or maintained roads.

In 1990, land in the Red Desert could be purchased for as little as $15 per acre. Today, 20 years later, ownership is still divided between the federal government and private parties, the area still no power, water, utilities or maintained roads, and the zoning is unchanged. Yet this same “barren and worthless” land now sells for as much as $500 per acre.

For those who invest in cheap land, it is the per-acre price that is important, not the per-parcel price. For example, a 160-acre tract for $31,840 is far cheaper that a one-acre lot for $4,000. Why? Because the 160-acre tract is priced at only $199 per acre, and the one-acre lot is priced at $4,000 per acre. Ever since the Pilgrims landed in 1620 and Americans began migrating west, people have made fortunes buying land by the acre and selling lots by the parcel!

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Advantages to Buying, Selling and Investing in Large Acreage

Buying, selling and investing in large acreage can be very exciting and rewarding. There are three inherent advantages to owning large tracts of land, as opposed to smaller lots.

  • First, there is almost an unlimited supply of small lots available for purchase, whilelarge tracts of land are a much rarer commodity.
  • Second, it is very difficult to subdivide a small lot, while large tracts usually can be parceled into smaller parcels, automatically increasing the per-acre price.
  • Third, in order for a small lot to increase in value, there has to be greater demand for usage, while large acreagecan increase in value simply as the result of ongoing and inevitable inflation.

In the year 1930, the Dow Jones was 294, and a person could have purchased large tracts of land all over the Western United States for $2 per acre. Today, the Dow Jones is approximately 11,000, representing a value 37 times higher than it was 80 years ago. Yet it would be very difficult today to find land for sale anywhere in the United States for less than $200 per acre, representing a value 100 times higher than it was 80 years ago.

There is another important factor at work here that should not be overlooked. The Dow Jones is a group of companies, but in 1930 there were many individual firms that failed, went bankrupt, or were liquidated and no longer exist. However, every single acre of land that existed in the United States of America in 1930 is still here today and is worth considerably more money.

In order for stocks to increase in value, there has to be ongoing positive performance and greater earnings. Large acreage, however, will gain value simply as the result of inflation and population increase, both of which are inevitable in future years.

According to the U. S. Bureau of Labor Statistics, it took $6,536 in 2010 to purchase the same goods and services that $500 purchased in 1930. That means inflation caused the dollar to lose 92% of its purchasing power over the last 80 years. The population of the United States in 1930 was 127 million people; today it is 317 million and is projected to exceed 400 million by 2040.

In the future, if inflation continues as it has since the founding of the nation; if the population continues to increase as it has since the founding of the nation; and if no one figures out how to make more land –then the only conclusion is that the finite supply of large acreage has to increase in value in future years!

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Land Prices Per Acre

Land can be priced many ways: by the lot, by the square foot, by the parcel or by the acre. The pros, however, the old-time speculators and investors who’ve made millions of dollars dealing in cheap rural acreage, are only interested in land prices per acre.

Land sales companies, however, use many ways to hide and camouflage the per-acre price from the public. Sadly, even the largest and most reputable companies engage in this subtle form of deception.

One way is to advertise a 10,000-acre ranch for only $1 million. The unsophisticated buyer would assume that the price is an astonishing $100 per acre. Yet after delving into the facts more deeply, the real estate broker casually mentions that there are only 500 deeded acres, with the other 9,500 acres being state or federal leases. Thus the real per-acre price is $2,000.

Another widespread method, used by many Internet land sellers, is to advertise a lot for “only” $2,995, and state that it is one of the cheapest land deals available. But when it is discovered that the lot size is only one-acre, then the price is really $2,995 per acre—and that isn’t a cheap land price. A cheap per-parcel price can be an illusion, while a cheap per-acre price is where real value can be found.

The same principal applies to a nightclub serving alcohol. The nightclub buys whiskey by the gallon and sells it by the small glass—a very profitable formula. The same basic formula applies when dealing in rural real estate. A person should always concentrate on land prices per acre. In other words, buy large tracts by the acre, and sell small lots by the parcel.

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Cheap Acreage, a Good Investment

The term “cheap acreage” generally means land that can be acquired for under $500 per acre. This applies to a very tiny percentage of all the land for sale today in the United States. As inflation increases with massive government spending over the next few years, cheap acreage under $500 per acre will soon be a thing of the past. While the federal government can crank up the printing presses and create more paper money, it is impossible to create more land. Thus, there will be an ever-increasing amount of paper money chasing the same finite supply of land which is a formula destined to cause higher land prices in the future.

Some people might ask what cheap acreage can be used for other than grazing cows, hunting, camping, recreational purposes or long term investment. Following are just two examples to consider.

The Imperial Valley Venture

In the years between 1901 and 1907 the California Development Corporation attempted to build a water canal from the Colorado River westward into California’s Imperial Valley. The purpose was to provide a source of irrigation and turn the dry, desolate and uninhabitable area into a subdivision of lush farms.

Initially started by private promoters the project was eventually taken over by the Southern Pacific Railroad, with federal support promised by President Teddy Roosevelt. The United States Government owned most of the region and was offering cheap acreage for sale at $1.25 per acre.  The project failed after thousands of acres were sold and millions of dollars lost, and in 1909, the California Development Corporation was liquidated

So what happened during the last 100 years regarding prices for this cheap acreage? Much of the land is still dry, desolate and uninhabitable, yet it is very difficult today to find land anywhere in the Imperial Valley for less than $1,000 per acre.

The Rio Rancho Story

A more recent example of cheap acreage would be the city of Rio Rancho, New Mexico. In the 1960s, AMREP Corporation purchased 55,000 acres of cheap grazing land located north of Albuquerque for just a few hundred dollars per acre. AMREP began subdividing the land into residential, commercial and industrial parcels and initiated an aggressive nationwide sales program.

In the 1970s, the federal government indicted the top management of AMREP for, among other things, fraudulent activities, because they touted the land as a good investment. Several key executives were convicted and actually served jail time. In 1981, Intel built a $50 million manufacturing plant in Rio Rancho that created a large employment base. In the ensuing years, thousands of people moved to Rio Rancho.

The initial representations made by AMREP that the land was a good investment proved to be true: the 55,000 acres purchased for just a few hundred dollars per acre and resold to the public is now worth many millions of dollars and is basically a suburb of Albuquerque.

The Moral:

History has proven that it’s virtually impossible to lose money owning cheap acreage if it is purchase cheap enough and held long enough!

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