Debunking the myths about land banking, Part 2: You have to develop land yourself to make money from it.

Wealthy land developers make the news, and not-so-wealthy house flippers make it onto reality television. Everywhere you look, it seems like people are profiting from real estate investments by building on or expanding the property they buy. But is that really the best or only way to make money in real estate?

In the last installment of “Debunking the myths about land banking,” we discussed the misconception that cheap land doesn’t yield profit. Today’s topic is similar: people think that they must develop the land themselves in order to benefit from it.

The reality is that the potential for profit is often higher when you develop land yourself, but the risks you take on are also more serious. As a land developer, you need an understanding of basic sources of loss (e.g. contractors, higher property taxes associated with buildings), and you also need to be able to anticipate the social and economic circumstances that will allow you to profit off of your work. You take more risks, and sometimes, the payoff will be higher.

Land bankers work with developers, not as developers. As a land banker, you research and purchase a land parcel based on developers’ plans for it, not your own. You sell the land when development increases its value.

“But what if the land doesn’t get developed?”
Some areas aren’t suited for development, but attractive land parcels located in ideal locations don’t just sit around. Urban centers are expanding constantly (especially in California), and through diligent research, you can discover the land parcels into which they will expand.

“You don’t want to develop the land – what makes you think other people do?”
Working people with full-time jobs outside of land development certainly don’t have the time to develop land. However, profit-seekers and professional developers (e.g. municipalities, energy companies) do this for a living. They seek out the land with the most potential and make money by developing it. As a land banker, you don’t partake in the profits they gain at the very end of their projects – you earn money in the middle of the process.

“What about residential buildings?”
Investing in residential buildings comes with a slew of hidden costs that often don’t hit you for months or years down the road. We’ve tried – and enjoyed – investing in real estate as landlords; it’s a good way to learn about yourself, the economy, and investing in general. However, it’s also a costly, time-consuming investment: if you’re just looking to diversify your portfolio by including illiquid investments that earn in the long run, low-maintenance land banking might be right for you.

In the end, your lifestyle and interests should determine the kind of real estate investments you make, if at all. However, don’t limit yourself by thinking that the only profitable investments are the ones that require constant upkeep and work. In the long term, land in the path of development appreciates, and you don’t have to be a developer to profit from it.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.