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Real Estate in Its Purest Form

by Jeffrey R. Kosnett

Friday, April 13, 2007provided byKiplinger'sPersonalFinance

Residential real estate prices may be falling, but the cost of land is going up and can be a solid investment.

A few weeks ago I drove from Maryland to Florida and back. On long trips, I usually turn onto some two-lane state and county highways. This time, I had a mission: to watch for land on the market and get a sense of whether pure unimproved real estate is a plausible investment.

A few people who invest directly in real estate own all or part of neighborhood retail strips that house beauty salons, pizza parlors and the like. Most direct investors buy condominiums or houses. With houses or apartments the risk is big that you'll constantly be searching for tenants to keep the units filled and spend more time on the property than you want, unless you hire a property-management company for around 8% of the rent. Moreover, although some distressed investors may be trying to unload their properties, prices, based on current rents as a percentage of the gross cash flow, are still high in many places.

But none of this necessarily means that the timing is wrong for all real estate. One of the best-performing types of investment property lately has been land, specifically farmland or rural land that can be used for recreational activities or can be subdivided into parcels for homes with panoramic views.

The lure of land isn't a temporary phenomenon. Land has long been a desirable holding among long-term buy-and-holders who don't need current income or tax losses and can buy for cash or pay bank-loan installments from current income. Or consider the case of a Kiplinger's reader from northern California who just sought our opinion on a plan to take $125,000 from certificates of deposit and buy additional acreage adjacent to his six-acre country home. The beauty of the reader's plan is that it would combine the intangible value of having the acquired property serve as a buffer against unwanted development with a plan to hold the land for 10 to 20 years and sell it, perhaps in pieces, as a retirement investment.

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Land Investment Newpaper

Many people begin planning for retirement as soon as they start working.

This is a good idea for several reasons. People are living longer healthier lives so there are longer retirement years.

Also people want to be able to travel, possibly have a second home, and generally have money in order to enjoy their retirement years.

There are many ways of saving money and planning for the future. A great long term
solution is land investment.

Shortly after we were married we bought a small country home.

There was acreage next to the home that we purchased as a land investment. We soon out grew the home and decided to sell it, however we kept the land investment thinking that one day we may build on the property.

The taxes were minimal so we kept the land for several years.

After several years the owners of our former home contacted us about buying the additional acreage. We had decided that we would not build there in the future so we had the land appraised to sell it.

Our land investment had increased substantially from our original cost so we made a nice profit. We placed part of the money in an IRA and used the rest to purchase hunting land.

The hunting area was located close to a growing community. Shortly after making this second land investment we were approached by a developer that wanted to purchase this land from us to create a housing development.

My husband had found a different parcel of hunting land to purchase with his brothers, so we sold the second land investment, again for a substantial profit.

The joint land investment that we have entered into with my brother-in-laws involves a very large parcel.

This parcel is surrounded by state property so the hunting is very good and the surrounding property cannot be developed.

By having a large parcel we will be able to split the property and sell off lots in the future when this area is under development. Until this happens the guys have great land to hunt on.

Land investment is a solid way to turn a profit in a fairly short period of time, especially if the land is located in a growing area. There will never be more land created, so it is a closed market.

The taxes on undeveloped land are very reasonable so the investment is cost effective.

There is no maintenance involved and land prices are usually not affected by the stock market.
This makes for a sure, sound investment if you are looking to expand your portfolio.