Posted by Entrust Sacramento on Tue, Aug 10, 2010
Land banking can be smart, simple, and secure. If you adhere to the very definition of land banking, as the strategy of acquiring pre-developed land in the growth path of a major metropolitan area and holding (or banking it) to sell for significant profit in the future, your risk can be very low and your potential for return, as seen historically, can be very high.
It is usually a good idea to purchase land with cash, HSA, educational, or self-directed IRA funds. Borrowing money to purchase land is not land banking, it then becomes “land speculating.” The key words to yielding high returns are “acquiring pre-developed land.” Pre-developed land is:
- In an area that has already been targeted for growth.
- Located in the growth path of a major metro area.
- In an area with a diversified economy.
- In a close proximity to jobs and affordable housing.
There are 10 key indicators that usually determine the best hot spots for land banking:
- Land is usable and relatively level.
- There are abundant resources in the area.
- The area is easy to reach by car, train, or plane.
- Utilities are in place to accommodate rapid growth.
- Close to an ever-expanding major metropolitan area.
- Current industries and commercial base is growing.
- Existing residential development and low cost housing.
- Higher education institutions nearby and more planned.
- Regional studies projecting healthy population growth.
- Master plan for streets, roads, sewer, electric, and gas.
Land banking, as a long-term appreciation strategy, is for individuals that have both a sufficient income to sustain their current lifestyle and can wait at least five, or preferably 10 years, to reap the benefits of their investment. This can make land banking ideal for planning your retirement, saving for a college education, or building a legacy.
We have all heard the saying: “Most millionaires in America made their fortune in real estate.” That is a partially correct statement; the truth is that many multi-millionaires actually made it by land banking. Land banking has been used effectively for hundreds of years to protect and build family wealth.
Land banking has been used and continues to be used because it tends to be basically immune to economic cycles. While the values of both residential and commercial properties have been hit hard over the past couple of years, properly selected pre-developed land has remained steadfast, and in most cases, is increasing in value.
As with any investment, there is risk. Land banking, if practiced as intended, is a long-term appreciation strategy and the risks tend to be very, very low. However, there are some risks that should be taken into consideration prior to making a purchase:
- Land banking is not a readily liquid investment. I suggest that you plan ahead as to when you may need to sell your parcel of land. It may take six to 12 months to sell a piece a property for its full value.
- Since you’re purchasing pre-developed land, often without zoning or entitlements in place, cities, counties, and planning commissions can modify master plans or create unforeseen obstacles—potentially decreasing the value of your property.
- High property taxes can impact your cash flow and reduce your return on investment. Make sure you are land banking in an area that has had historically low taxes assessed on undeveloped or pre-developed land.
- Like any investment strategy, diversifying your portfolio over multiple items hedges your opportunity for loss or benefit. We suggest, resource permitting, that you purchase two or three parcels in different areas.
There is no such thing as a perfect investment, but land banking does have one key advantage over most others, which is best expressed by Mark Twain: “Buy land, they’re not making it anymore.”
In 1975, as part of the Employee Retirement Income Security Act (ERISA) and the creation of IRAs, self-directed IRAs were also permitted. “Self-directed” means that you make the decisions about your retirement investments—in much the same way you may invest outside your retirement plan. With a self-directed IRA, you are able to purchase a wide variety of assets including real estate, mortgages notes, tax liens, and even private businesses. Yes, there are some restrictions and prohibited investments, so I recommend consulting with your CPA or a self-directed IRA custodian.
Custodians hold title to the assets in your IRA. These companies are federally regulated trust companies and commercial banks and most of them only hold-listed stocks, bonds and, mutual funds. Only a small number of these custodians are interested in holding title to assets like real estate. Yet, certain types of real estate assets like pre-developed land are typically lower risk while providing a higher return opportunity.
In fact, earning potential using real estate inside an IRA has caused many individuals and small business owners to rethink their current retirement strategies. There are countless numbers of celebrities, like Bob Hope, who have made more money in land banking than in the entertainment business. It is truly the secret of the super-rich and I am here to share it with you and educate you on how you can get started using your IRA funds.
Now is one of the best times in history to put your retirement account to work for you, and land is one of the best ways to grow your wealth for retirement. You can get started with a surprisingly small amount in your IRA by using a non-recourse loan. Using leverage inside your IRA can be very complicated. Loans for any asset purchased in an IRA must be non-recourse. Use a professional to handle the process and avoid the severe penalties of doing something incorrectly.
By Michelle “Land Diva” Shaman
For more information on land banking visit www.landdiva.com to see upcoming events where the Michelle “Land Diva” Shaman will be speaking live visit www.mywealthspa.com
DISCLAIMER: As an IRA administrator, Entrust Administration, Inc. does not affiliate itself or make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms). Entrust Administration, Inc. is not responsible for and is not bound by any statements, representations, warranties or agreements made by any such person or entity and does not provide any recommendation on the quality profitability or reputability of any investment, individual or company.
Posted by Entrust Sacramento on Mon, Mar 08, 2010
Some of you may have considered a non-recourse loan for your
real estate investment, either because you are short on cash and/or want to use loaned monies as leverage for your investment. While it’s true a non-recourse loan is an option for real estate investment, there are other available options that prevent your IRA from being subjected to UDFI (Unrelated Debt-Financed Income) tax.
A non-recourse loan is a secured loan (debt) utilizing a pledge of collateral, typically real property, for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. The UDFI tax is a subset of UBIT. Under IRC § 514, the IRS will assess a tax on any income that is derived from the use of, “acquisition indebtedness,” in passive
self-directed IRA investments. For example, if you use $30,000 of funds from your self-directed IRA and borrow $70,000, using a non-recourse note, to purchase a $100,000 rental property that generates $10,000 annual rent, the IRS would assess UDFI tax on about $7,000 of the profit. That is because 70% of the investment came from leverage. The tax rates for UDFI ranges from 15-38%. Solo/Individual 401k accounts and other qualified plans are exempt from UDFI. You can consult your CPA or tax professional for more details
An alternative option to a non-recourse loan is an investment partner. Below is a list of investment partners to consider:
• Self-Directed IRA Holder(s)
• Qualified Plans (i.e. 401K, 457, 403B, etc..) and IRA Holder(s)
• Private Investor(s)
Someone from this list can partner with you in a TIC (Tenants In Common) relationship, in which case your interest rate may be lower and the terms may be more flexible than a lender, without being subject to UFDI. You would still be employing the concept of using OPM (Other People’s Money), but without the added tax cutting into your profit. Relative to the percentage of ownership of the property among all parties, the profits and expenses must be split accordingly. For example, if you decide to partner with your spouse’s or other investors’ IRA and/or private funds to make a real estate purchase and the ownership between both parties is 50/50, all expenses, rents and profits must be split in accordance to these ownership percentages.
There are investors in your community and local investment clubs who are losing money in the stock market, have employers who are no longer matching their 401K’s and/or are not making a great return that are looking for alternative investment options.
The above listed information is NOT intended to be tax or legal advice as Entrust do not provide legal and/or tax advice. The variables are designed to educate investors and for you to factor in these variables when making your investment. For more information call me at (916) 509-7271 or come into our office for a free no-obligation consultation.
By Lamarr Baxter, Business Development Manager
lbaxter@theentrustgroup.com