Contributed Article
04/15/2008

Why Buy Land?

For many people, real estate is the alternative investment of choice, according to Tom Anderson, president of PENSCO Trust, a custodial firm specializing in self-directed IRAs. 'The slowdown in the real estate market really hasn't affected our business because we're talking about investment properties versus personal residences, and people are taking advantage of down market opportunities,' he said."

-Wall St. Journal 6/6/2007

"Retirement-home sales are growing -- among buyers still decades away from retiring. From New York's Catskill Mountains to Oregon's rocky coast, younger couples who might otherwise be focused on building a nest egg instead are buying a lakefront house or country cabin that they hope to one day use in retirement."

-Wall St. Journal 5/3/2007

Real estate, after all, is the quintessential scarce resource. You simply can't go out and create new land. So it seems only natural that its price would keep going up and up. There's also something intuitive about real estate: Compared with, say, the abstract nature of corporate equity, real estate is tangible. We see it. We rent it. We walk on it. We live in it. And, chances are, we've made money off it: Of the more than two-thirds of Americans who own their own homes, a significant portion have seen them appreciate in recent years."

Regardless if you are looking for a real estate property for investment purposes, or as a site for a future home; investing in land is proven to offer a safer and higher return on your investment than any other financial instrument available today. Traditional investments (stocks, bonds, etc.) over the past couple of years have seen average returns of 4-8%. In contrast, real estate and land investments have realized cash on cash returns of greater than 200%; with less risk.

If all that were not enough, it gets even better. For those who qualify, only 5% down payment is required instead of the traditional 10%. The bank will put up the remaining 95%. This means double your leverage for even greater return on investment. Here's the best part. Many of the developers of these pre-development land projects will cover the payments on your mortgage for up to two years. You put up virtually nothing, buy at pre-development prices, make no payments while waiting for further price appreciation and then rake in some serious profits when you do sell.

The Baby boomer Factor…

• Baby boomers make up an incredibly large percentage of our population; all moving towards retirement age over the next 15 years.
• About one half of these people have no intent on staying in their current locale when they retire.
• Even though many boomers are ill prepared for retirement, there is still a significant percentage with tremendous wealth; Today’s boomers possess 70% of the nations net worth.
• Many of these people want to live in places with good “lifestyles”, with 42% of them choosing the South Atlantic area for their retirement.

According to American Demographics Magazine, “The south is the center of a real estate boom of monumental proportions”. Searching for a warmer climate and a simpler way of life during retirement are their primary motivation.  With close to 75% of potential retirees expressing an interest in moving below the 35th parallel, an estimated 50 million people could be moving to the south over the next 20 years.

It is this Baby boomer demographic that is driving the appreciation and sales volume of second homes in the south.  This marks a new and unprecedented era, as it is the first time in history we have ever seen this kind of significant shift in real estate buying patterns.  As we are currently in the very early stages of this major demographic shift, the smart investors are taking advantage of this knowledge, purchasing now and have the peace of mind of a safe and reliable exit strategy when they want to sell. 

• Lock in low payments now.  Act now while interest rates are at the lowest they have been in 20 years.
• Little to no effort required (turn-key investment).
• Save money by investing at today’s pricing.  As more and more investors are taking advantage of these opportunities, the price points continue to rise, sometimes on a monthly basis.
• Availability; the best opportunities available today are the ones that are typically gone tomorrow.  When you hesitate, you could miss out on a one of a kind opportunity.
• Invest now at pre-construction prices.  The smart investors will purchase their property before all the amenities are in place.  Amenities like roads, golf courses, schools, club houses, recreational facilities, nature trails, marinas, boat ramps, swimming pools, etc. all add value to the property.  By investing now, you can enjoy pre-construction prices, which are almost always guaranteed to be below the selling point once the amenities are in place.
• 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.

At some point, though, those same overseas investors will realize that U.S. real estate is a great hedge against what they fear most: an attack of runaway inflation in the United States. A physical asset such as land goes up in value when inflation soars. At some point, those overseas investors will notice that land in the U.S. is cheap enough that any recovery in the American economy will produce windfall profits. Buying land won't solve the global problem created by a shrinking supply of long-term investment-grade paper when an aging global population is creating a soaring demand for that kind of asset. There isn't enough land to do that. But buying land at a time when global demand for this kind of asset is climbing could solve the long-term, investment-grade asset problem posed by your own retirement.

There is, however, a catch. There's always a catch. Although I believe buying land via the shares of land-rich U.S. companies is a great way to fund a long-term retirement, I can't tell you how long it will be before the market discovers the value in these stocks and bids them up in price.

So I'll continue to hold Tejon Ranch (TRC, news, msgs) in Jubak's Picks, even without a dividend, because at a stock price that I calculate is equivalent to less than $6,000 an acre, this owner of 270,000 acres within 60 miles of Los Angeles is just too good to pass up.

But with the direction of the stock market so uncertain and the timing of a return to a "normal" bull market so uncertain, I'd rather own shares of a land stock such as Rayonier (RYN, news, msgs) that pays a healthy dividend (currently 4.35%). Rayonier owns, controls or leases about 2.7 million acres of timberland. Some of that -- what's known as higher- and better-use land -- is more valuable for development than it is as timberland. I'd estimate that about 400,000 acres fall into that category.

Of this higher- and better-use land, Rayonier owns 200,000 acres in the Georgia-Florida coastal corridor. The company recently sold 3,100 acres of that for about $15,000 an acre. At a recent stock price of $47.71, my estimate of 400,000 higher- and better-use acres means that by buying Rayonier shares, you can buy an acre for $9,300. See the potential for some real-estate appreciation here?

And the gains could be even better than that per-acre figure implies because I'm assuming the land-hungry investor cares only about the value of the company's land and thinks the rest of the company's business is worthless. Now that's certainly not true. In fact, it's the other businesses of Rayonier and two other companies I mention below that enable them to pay investors dividends while we wait for land values to rise. And those timber-to-wood-products businesses are themselves good plays on the rising demand for paper, wood products and timber as economies such as China's and India's accelerate. But my simplified calculations work well enough to show investors how undervalued land is at companies like these.

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