Land Banking - The Alternative To Eating Dog Food Straight From The Can by Bill Roberts
Is Land Banking for you? Should you get started immediately?
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.
End of Year
Ten Years Later
If this is where you start "drawing down" your IRA by $2,000 per month it will not grow any more but will start to actually decline.
Can you live and maintain your lifestyle with a measly $2,000 per month added to your Social Security? And remember, inflation will have cut the purchasing power of that two grand by a significant amount in ten years.
The Land Banking Alternative
Now for our Land assumptions: You find a nice five acre parcel about five miles out of town on a main road at a point where a major cross street will be. When the city catches up with this land, it will be very desirable. The price is a hefty $200,000 now, but its future potential is fantastic. You anticipate getting a million dollars or more in ten years when it is time to retire.
- Is this a good investment?
- Can you actually do this?
- What about financing?
After a "down payment" of $100,000 the owner agrees to carry back a first trust deed on the balance at 8% interest payable $1,000.00 per month or more until paid. This type of owner financing for land is generally doable. Conventional financing is also available at other rates and terms.
Making Use of the Land
This particular parcel is well-suited for growing palms. A palm grower/nurseryman has agreed to lease the property from you for $12,000.00 the first year with a 7.2% per year escalator. He sees the value of having his retail nursery here along with growing palms. Over the ten year period he expects to make a lot of money with this location. He knows that as the city grows towards this corner, it will become increasingly more advantageous. In a couple more years he wouldn't be able to get it at all, at any price. He is really anxious to make this deal.
The whole project is put in management to make it just as easy to manage as the mutual fund was. You get a monthly statement, your taxes are filed, and you just sit back and wait. No sweat!
Gross Cash Avail
Net Cash Flow
After just eight years you have managed to pay off the land completely.
After the 10 year lease expires, and just in time for your retirement, you have the property appraised. It seems that it is now worth $200,000.00 per acre or $1,000,000.00 for the entire 5 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.
Make The Comparison
So compare the performance of your traditional IRA investment with using a self-directed IRA to engage in a little Land Banking:
Your traditional IRA is worth $294,119.94 versus your self-directed IRA which has a value (cash plus land) of $1,029,370.98. It's NO CONTEST! You end up with 3-1/2 times as much money to retire on by banking on land.
At this point you could sell the land, develop the land, or renew the lease to the nursery. Because of the increase in value, you will be able to take distributions from your IRA without affecting its value or its ability to continue to grow. This represents a much better alternative than the traditional IRA.
The scenario described is for example only. There are many other possible scenarios for your self-directed IRA. You could invest in free-and-clear land, residential income property, immediately developable land, or even shares (participations, memberships) in an LLC. You are limited by your imagination, amount of "work" you want to do, and your tolerance for risk.
If you want more information or you are ready to set-up your own Self-Directed IRA call Bill Roberts (619) 244-4610.