If you are not sure then what you need is an example.
Let's say you have $100,000.00 in your IRA account at a major brokerage house. You want to retire in 10 years. What will this IRA be worth then?
In order to answer that we need to make certain assumptions: You will invest another $5,000.00 per year into your account at the beginning of each year in an effort to "catch up."
You will "earn" an 8% ROI compounded annually because your IRA is "invested" in a mutual fund that historically has grown at that rate.
year
Beginning
Contribution
ROI
End of Year
1
$ 100,000.00
$ 5,000.00
$ 8,400.00
$ 113,400.00
2
$ 113,400.00
$ 5,000.00
$ 9,472.00
$ 127,872.00
3
$ 127,872.00
$ 5,000.00
$ 10,629.76
$ 143,501.76
4
$ 143,501.76
$ 5,000.00
$ 11,880.14
$ 160,381.90
5
$ 160,381.90
$ 5,000.00
$ 13,230.55
$ 178,612.45
6
$ 178,612.45
$ 5,000.00
$ 14,689.00
$ 198,301.45
7
$ 198,301.45
$ 5,000.00
$ 16,264.12
$ 219,565.57
8
$ 219,565.57
$ 5,000.00
$ 17,965.25
$ 242,530.81
9
$ 242,530.81
$ 5,000.00
$ 19,802.46
$ 267,333.28
10
$ 267,333.28
$ 5,000.00
$ 21,786.66
$ 294,119.94
Now for our Land assumptions: you will be able to find 40 acres outside of town that appear to be in the Path of Progress. You are able to pick this parcel up for $5,000.00 per acre, or a total of $200,000.00. The owner agrees to carry back a first trust deed at 8% interest payable $1,000.00 per month or more until paid.
This particular parcel is well-suited for growing palms. A palm grower has agreed to lease the property from you for $12,000.00 the first year with a 7.2% per year escalator.
The whole project is put in management to make it just as easy to manage as the mutual fund.
Year
GSI
Expenses @33%
NOI
Contribution
Gross Cash
1
$ 12,000.00
$ 3,999.60
$ 8,000.40
$ 5,000.00
$ 13,000.40
2
$ 12,864.00
$ 3,087.36
$ 9,776.64
$ 5,000.00
$ 15,777.04
3
$ 13,790.21
$ 3,309.65
$ 10,480.56
$ 5,000.00
$ 16,257.60
4
$ 14,783.10
$ 3,547.94
$ 11,235.16
$ 5,000.00
$ 16,492.76
5
$ 15,847.49
$ 3,803.40
$ 12,044.09
$ 5,000.00
$ 17,536.85
6
$ 16,988.51
$ 4,077.24
$ 12,911.26
$ 5,000.00
$ 19,448.11
7
$ 18,211.68
$ 4,370.80
$ 13,840.88
$ 5,000.00
$ 20,288.99
8
$ 19,522.92
$ 4,685.50
$ 14,837.42
$ 5,000.00
$ 20,126.40
9
$ 20,928.57
$ 5,022.86
$ 15,905.71
$ 5,000.00
$ 21,032.12
10
$ 22,435.43
$ 5,384.50
$ 17,050.92
$ 5,000.00
$ 29,370.98
11
$ 24,050.78
$ 5,772.19
$ 18,278.59
$ 47,649.57
Debt Service
Net Cash Flow
Principal
Balance
$ 12,000.00
$ 1,000.40
$ 4,000.00
$ 96,000.00
$ 15,000.00
$ 777.04
$ 7,320.00
$ 88,680.00
$ 16,000.00
$ 257.60
$ 8,905.60
$ 79,774.40
$ 16,000.00
$ 492.76
$ 9,618.01
$ 70,156.39
$ 16,000.00
$ 1,536.85
$ 10,387.49
$ 59,768.90
$ 18,000.00
$ 1,448.11
$ 13,218.49
$ 46,550.41
$ 20,000.00
$ 288.99
$ 16,275.97
$ 30,274.44
$ 20,000.00
$ 126.40
$ 17,578.05
$ 12,696.39
$ 13,712.06
$ 7,320.06
$ 12,696.39
$ -
$ -
$ 29,370.98
$ -
$ 47,649.57
After the 10 year lease, and just in time for your retirement you have the property appraised. It seems that it is now worth $25,000.00 per acre or $1,000,000.00 for the entire 40 acres. This increase is partially due to inflation, but it is also due to the fact that the town has grown out towards your land.
So compare the performance of your traditional IRA investment with using a self-directed IRA to engage in a little Land Banking:
$294,119.94 versus $1,029,370.98. It's NO CONTEST! You end up with 3-1/2 times as much money to retire with by banking on land.
Matthew, the principle is very basic: land appreciates. The factors at work are the declining value of the dollar and the increased demand for the land due to expansion in the area. I am in Southern California and we expect tremendous population growth over the next ten years. If the value increases 125% over the ten year period due to inflation, then it only has to grow by a factor of 2.22 times in order to attain the 500%.
Personally, I think this is VERY conservative as long as the initial selection was done properly.
Our land values have held strong during current situation. Maybe some large tracts held by home builders took a hit, but not commercial. If anything they are stronger as the money moves in that direction.
Excellent post Bill! Numbers always win the argument. It's sometimes hard to convince buyers that land is a good long term investment when they can't "see" their annual return. Breaking it out like this is gives a good visual (provided you can back up your calculations and data of course).
Not sure we'll be growing palms much here in North Georgia, but there are other income opportunities (logging rights, hunting leases, etc.). As for the current downturn? It's like the stock market . . . those in it for the long haul win out over speculators and flippers. Land is finite, population is growing. The math is simple. Here locally we've suffered the same hit in residential sales as other parts of the country, but land sales haven't been affected as much and prices have continued to climb!
I particularly like your "path of progress" point. When looking for investment land, the trick seems to be not just finding the cheapest possible tract (there's often a reason it's cheap), but one that will most benefit from the double bump of appreciation and growth.
Very good post, Bill. We have always believed this and we are better off financially because of it. Real Estate is a good investment but it is not liquid and can take a while to cash in. So I think "don't put all your eggs in one basket."
Powerful stuff.....sorry I've missed so much content lately. I read one of your posts lately that referred to this group that you head up.
I'm a huge fan of owning land....while I sold 10 acres in the last couple of years, I intend to buy some more as the rate of appreciation is actually better in my experience than residential.
Chris, one of my investment strategies is to buy the well positioned commercial land and then develop it yourself. Here where standing commercial properties are valued at 4% ROI or even lower ROIs, building can give you an automatic equity of up tp 50% from the get go.
Great post Bill! Finally found someone who thinks as I and has the knowledge and expertise to show people true wealth building strategies. Thanks much. Your on my go to list.
Hi Bill, It took me a while I know. I'm trying to get a handle on this blog stuff. Anyway, I'm in Yucaipa, Ca. Didn't get my RE Lic to put signs in yards but rather show people how to Retire, Rich, comfortable and secure owning Real Estate in their IRA"S. Now, more than ever, people need to know and get educated about Self Directed IRA"S for personal and business wealth building. Stay in touch and keep writing. Thanks much.
Good post, but no investment is a lead pipe cinch. Your scenario of the land carries more risk than the mutual fund investment due to the leverage and the need for a tenant to pay your debt load and property taxes. Without a tenat the land scenario implodes. With a tenant you still have more "work" involved in the land for the higher return.The mutual fund you just have to monitor
From 1995 to 2000 the stock market out performed Real estate as an asset class. From 2000 to 2005 real estate outperformed the market. The best scenario with less risk would be smaller parcel of land and half the mutual fund investment. The 50/50 blend smooths out the differnce in the asset classes and reduces risk and increases liquidity.
No portfolio is fool proof. In any given 10 year period my 50/50 scenario will outperform your scenario 95% of the time with less risk.
That said your strategy is great-- its just not good to put all your eggs in one basket.
Matt, We are on the same page so I will be keeping in touch. Thank you.
Jane, They say that everything old is new again (at some point). We aren't thinking outside the box but merely taking a new look at old ideas.
Spencer, Thank you for commenting. I could argue that your points are not convincing but I would rather be on good terms with you. Land investments should only be financed if there is a tenant available or the payments are equal to or less than the amount of additional investment the investor is commited to do.
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What will this IRA be worth then?
;)
;)
