In my last column, we began discussing a special real estate acquisition matrix I developed. Part of this matrix’s purpose is to determine which type of real estate investment philosophy best applies to you. In the last column, we covered the first type of three categories of real estate land investors: the real estate speculator.
The second type of real estate land investor is where I found my investment home. It is the camp I call “Predevelopment Land Bankers.”
When I first analyzed land investing in the early 1970s, I realized almost all land investors were playing as speculators. Once I disqualified land speculation for myself, I was somewhat disillusioned. I had already determined the land was what made my wealthiest client wealthy, but my first preview revealed only these speculative opportunities. Then I found a second group of players who made big profits virtually every time they bought. In the Dallas real estate market where I lived, back then these people were Ross Perot, the Hunt brothers, Bob Folsom, Trammell Crow, etc.
This group was not speculating; instead, they bought large tracts of land that if left alone would remain undeveloped for many years. Then, because of their influence, money, political contacts and organizations, they physically enhanced the land. They might pay for and build sewer plants that were not in the city’s plans for the next 20 years and then donate them to the city in exchange for zoning; or they may build important infrastructure, roads, etc.
In other words, they bought the property as raw farmland and through their efforts changed it to development property and made all the profits for doing so. Quite often, they then also made the final profits by physically building the actual structures on the property.
I felt that this was great; they hit a home run every time. There was just one small problem, however. I did not have Ross Perot’s money or Trammell Crow’s contacts.
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Then it dawned on me: If I put my boat in their harbor, when their activities raised the tide, my boat would rise right alongside theirs. My plan ultimately became quite simple. Find two or three major developers who have already started their developments, wait for them to finish zoning and the development of the infrastructure and then actually kick off their projects. If I found one major development over here that was underway with 10 percent of the rooftops (homes) in place, and another over there with 15 percent of its Phase 1 in a 4-phase project completed, if I then followed the traffic patterns from those subdivisions to the workplace, I would always come to a major underdeveloped intersection. It was undeveloped because you cannot develop retail space until you have enough rooftops to support it. In fact, this intersection was still usually three to five years away from having the demographics needed for development.
I then determine what is called the “going home” corner (the corner people passed on the way home from work) and would try to buy that one. The reason for buying the going home corner is that is where people will want to stop on the way home to pick up what they need. Therefore, that corner should also be the first to develop.
Granted, because of the new major activity and publicity in the area, the speculation had already occurred a long time ago on that corner. Therefore, its price was no longer 5, 10 or $20,000 an acre, but instead 40, 80 or $120,000 an acre. In addition, all of the true real estate speculators were now three hilltops over the next horizon looking for the next hot area.
Now remember, it is still 3-5 years before the demographics in this area could justify retail development. It has been these types of tracts I bought because I knew in just 3-5 years, what I bought for $2-3 per foot would be worth $6-8 per square foot or more. Additionally, taking a piece of land from $3-8 per foot in a 3-5-year period can produce some very handsome returns. If we got lucky, it all happened quicker.
With this system, I knew when the first subdivision was finished in three years and the other in four years that the demographics from these would create the demand for my property to be developed. Therefore, I let the big boys make my properties usable by their developments, and it worked repeatedly.
The final camp or type of real estate investor is that of the land developer. They are the ones who are the real user of the land. They turn it from dirt to a finished product, which can generate income.
The land developers’ profits are the smallest of the three groups, but the most predictable. This is because they are more in control of their own fate.
I have often been tempted to continue from predevelopment land banker to land developer, but in the final analysis have decided against it. The reason is not that it is not a profitable area, but that it does not meet my personal investment goals. Being a land developer is a hands-on business that requires full-time work staying on top of the development. On the other hand, as a pre-development land banker, I have managed a $150,000,000 portfolio of land investments, part-time, with the help of a real estate broker and property manager.
In my next column, we will explore why all returns on investment are not equal.