Land Banking - The Alternative To Eating Dog Food Straight From The Can

By
Services for Real Estate Pros with Brooks and Dunphy Real Estate DRE 00527512

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.

Traditional IRA

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

 

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!

Year

GSI

Expenses @33%

NOI

Contribution

Gross Cash Avail

      

 

 

 

 

 

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

Loan 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 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.

 

 

 

Posted by

Please comment. All comments are greatly appreciated.

Bill Roberts

 

View William (Bill) Roberts's profile on LinkedIn

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Location:
California San Diego County
Groups:
Retirement Planning

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainer
155,621
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

Sounds like a deal!  I'd be very careful with your choice of the property though! 

 

Bob Mitchell

ValueList Real Estate Services, Inc. 

Jan 05, 2008 05:55 AM #1
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Bob, Of course you have to pick a good parcel. Nothing is automatic.

Thanks for commenting.

Bill Roberts

Jan 05, 2008 06:43 AM #2
Rainer
70,478
Jan Wood
None - Gallatin, TN
Bill:  You give sound advice... Wish I had known you about 10 years ago, I'd be ready to retire.
Jan 05, 2008 06:48 AM #3
Rainmaker
291,174
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

Bill you are always full of incredible information.  I had read about investing in lots and "renting" them out but not land banking.  Very interesting strategy, we might just sell one of our rentals and do this...

 

Jan 05, 2008 07:11 AM #4
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Jan, Yes, ten years is about right. There's still time.

I appreciate your kind words.

Bill Roberts

Jan 05, 2008 07:32 AM #5
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Kate, When real estate "appreciates" it is the land component that appreciates. Improvements depreciate. Therefore, you get better performance on land than you do improved property with a lot less headaches.

Good luck.

Bill Roberts

Jan 05, 2008 07:36 AM #6
Ambassador
589,209
Julie Chapman
DR Horton - Lakeland, FL
New Homes Sales Lakeland Florida

Bill,

My personal spin on this was to sell a portion of the land and hold the mortgage on it.  Part of the property apreciates while the balance collects interest........12% to 16% interest.....You truly are the genius of Baby Boomer Retirement Planning........

Jan 05, 2008 09:19 AM #7
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Julie, There are many variations on this scenario. You just have to do what works for you.

Thanks for chiming in.

Bill Roberts

Jan 05, 2008 10:20 AM #8
Ambassador
898,520
Frank Rubi
Frank Rubi Real Estate, LLC - Metairie, LA
FrankRubiRealEstate.com
Bill, you bring up a great point. Many agents need to look at this post and apply to their situations.
Jan 06, 2008 08:58 AM #9
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Frank, Thank you. We make our living with real estate, we should believe in it enough to use it for our retirement also.

Bill Roberts

Jan 06, 2008 09:05 AM #10
Rainer
19,322
The TaxMan
Self Employed - Oakland, CA

Bill, you're my kind of guy... much better to take retirement into your own hands.

And we all know investing in real estate is the proven way to do it.

I wrote something very similar to this, called "How to turn 20k into 6 million in 20 years"

Jan 06, 2008 05:54 PM #11
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Scott, I took a look at your post and left a comment there.

You could post this (and any others like this) to my new group Retirement Planning.

Thanks for commenting.

Bill Roberts

Jan 07, 2008 12:47 AM #12
Rainer
13,196
Terry Kuehn
Family Real Estate Services, Inc. - Tacoma, WA
Self-Directed Roth IRA Associate
Bill, self-directed Roth IRAs are "the only way to fly." It's amazing what I have accumulated in just a few years. BEAUTIFUL rate of return, 100% tax-free profit. I have several LLCs in progress and am now working on an additional one, this one with an MD.
Feb 08, 2008 04:48 AM #13
Rainmaker
684,598
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Terry, I like to hear success stories like yours. How about some posts on the subject?

Bill Roberts

Feb 08, 2008 04:56 AM #14
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
684,598

Bill Roberts

"Baby Boomer" Retirement Planner
Ask me a question
*
*
*
*
Spam prevention

Additional Information