Posts Tagged ‘buying land’

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 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.

Why it is Better to Buy Cheap Land Instead of the Investing in Stock Market

The stock market can be very risky. Income properties can become vacant. Homes can decrease in value. Inflation chips away at the buying power of cash. Commodities can be outright treacherous, and gold can be confiscated by the government (as happened under President Franklin D. Roosevelt). Since the founding of the United States in 1776, however, buying cheap land and holding it long enough has always proven to be profitable.

There are many approaches to the land investment business—ranging from large-scale commercial developments with many moving parts to simple long-term investments—based solely on price.

An example of the first would be the Newport Beach, California, developer who acquired 23.5 acres just off the Las Vegas Beltway in 2007 for a price of $30.2 million. A large commercial development was planned, but instead the property went into foreclosure and was repossessed by the bank. The bank resold the 23.5 acres in 2011 to a group based in New York for only $4.4 million. Sadly, the California developer lost over $25 million in just four short years.

Conversely, for the same $30 million in 2007, he could have acquired 120,000 acres ($250/acre) in the middle of “nowhere” in some Western state like Wyoming, South Dakota, or Texas. Today, in 2011, even considering the economic recession, the 120,000 acres would probably be worth between $36 million ($300/acre) and $40 million ($333/acre). And 20 years from now, it could be worth $90 million to $120 million ($750/acre to $1,000/acre)—all with no effort or expensive development plans at all, just sitting and waiting!

When an investor acquires expensive urban land, success usually relies on many moving parts such as zoning, entitlements, financing, the state of the economy, and so on. In other words, there are many “land mines” that have to be side stepped before a payday is realized, and this type of land investment is violating one of the oldest rules—namely; never place your money where others can vote on it.

Buying cheap land, with the main consideration simply being price, is an entirely different matter. Why? Because an investment like this doesn’t rely on population growth, zoning, or development. The future value of a large tract of low-priced acreage is determined chiefly by the passage of time and inflation—both of which are inevitable!

Click here for opportunities in buying cheap land