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How to Avoid Risk When Investing in Real Estate

When we tell people we’re land bankers, people sometimes balk. “Investing in real estate? Isn’t that risky and difficult?” Difficult, maybe, but we aren’t afraid of the risks we take. There are two reasons for that.

First, we love to research. Land banking has made us financially independent and freed us from jobs we didn’t really like. Instead, we’ve taken up the new job of researching land and learning about future development projects. When we think about investing in a piece of land, we track down all the available information about that land, including anything any civic or business leader has said within a hundred-mile radius of the place (we’re serious).

What results from this intensive, highly specialized research is confidence in our investments. When we finally decide to purchase a piece of land, we have become so familiar with it that it feels like home, and more importantly, it is the obvious right decision. We manage and familiarize ourselves with our investments. Barring the risk of unforeseen catastrophes, this rigorous planning makes us feel good about the probability of losses.

Secondly, land banking is, in a sense, the art of putting the risk on someone else’s shoulders. Once we determine that land is in the path of development and is well suited for what is to come, we wait for the developers to arrive. They take on most of the risks, investing time and capital into technological and infrastructural transformations that may take decades. You may have heard of the two types of leverage: other people’s money and other people’s time. Land banking is leveraging other people’s time.

What about unforeseen barriers to development? Natural disasters, hidden soil imperfections, and other unpredictable problems can stagnate or reverse the development of a land parcel. That’s why we don’t invest in just one. Just as investors in financial products diversify their portfolios to include investments from many industries, we diversify our land bank to include land from many areas. The pieces of land we purchase have also been “scoped out” by developers for many purposes; if one piece of land doesn’t appreciate, it’s not a crisis. We take that loss in stride.

For that reason, financial flexibility (but not necessarily financial independence) is important for land bankers. You don’t need to have a lot of cash on hand to invest in land. However, you should be able to tap into other resources – more liquid assets in other places as well as human advisors who can help you make the best purchasing and selling decisions. Some of our most successful partner investors have started with little capital but a lot of flexibility.

The idea that buying inexpensive pre-developed land is risky comes from a lack of information. When you see the growth potential of land parcels near urban centers, you’ll see that with the right research and diversification, land banking isn’t risky. It’s a safe, long-term, and tangible investment that can support you and your family into a comfortable future.

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.