What Is Land Investing?
Land investing is the process of purchasing raw, undeveloped land with the intention of holding it for long-term appreciation or flipping it for a profit.
Unlike traditional real estate investments like residential or commercial properties, land investing involves fewer maintenance costs and can offer substantial returns when managed correctly.
Investors typically target land in areas poised for development, purchasing at lower prices and selling once the demand increases.
This investment strategy is attractive due to its simplicity, lower competition, and potential for significant profits.
One of the beautiful things about investing in land is that land value is a little subjective.
Once you get good at figuring out the value of a particular piece of land, it’s easy to know if it’s a potential deal.
Land investing can take many forms, including:
Residential Lots: These are parcels of land zoned for housing.
Investing in residential lotAll Postss near growing cities can be lucrative.
I’ve also made good money buying and flipping infill lots. These are typically the lots that still remain after a neighborhood has been developed.
Commercial Land: These are plots intended for business use.
Land near highways, business districts, or planned commercial developments often appreciates quickly.
Commercial land is also usually zoned for commercial use (at least in my area).
One strategy that I’ve heard of but haven’t done yet is buying lots in areas that are moving toward a commercial feel and then getting the zoning changed.
Once you change the zoning to commercial, the land will usually go up in value.
You’d just have to learn the process for doing that in your area and do your own due diligence before buying.
Agricultural Land: This includes farmland used for crops or livestock.
It can generate rental income from farmers while also appreciating in value.
Agricultural land sometimes offers tax breaks as well if you keep livestock on it or other particular uses.
In the case above, it opens up some options. For example, you could buy the land, lease it to somebody for their livestock, and then get the agricultural tax break.
Recreational Land: Properties used for outdoor activities like hunting, fishing, or camping.
These can be leased for passive income or sold for profit.
In this day and age with Airbnb you could put small cabins or campsites on it and offer overnight stays.
You’ll need to check the rules in your area for doing this and take liability into consideration.
Infill Lots: As previously mentions, infill lots are smaller parcels of land within already developed urban areas.
These are valuable due to their location and potential for quick development.
Why Land Investing Is a Great Wealth-Building Strategy
Appreciation Potential: Land values can increase significantly over time, especially in areas experiencing population growth or infrastructure development.
As cities expand, previously overlooked land can become prime real estate.
Low Maintenance: Unlike buildings, land requires minimal upkeep, reducing ongoing expenses.
There are no tenants, repairs, or property management headaches.
Property taxes are also much lower because property tax is usually based on value.
Since raw land has no structures, the value is lower than land with a structure so the property taxes are much less.
Diverse Uses: Land can be used for various purposes such as agriculture, residential, or commercial development, offering flexible exit strategies.
You can sell to developers, lease it, or subdivide and sell smaller parcels.
Many people have made good money simply subdividing land and reselling.
For example, let’s say you find a 10 acre property and buy it and subdivide it into ten 1-acre properties.
Now you can sell off each of those and typically make more money than you would just flipping the 10 acre parcel.
Limited Supply: Since land is a finite resource, its scarcity can drive up value as demand grows.
As urban sprawl continues, undeveloped land becomes increasingly valuable.
Tax Advantages: Certain land investments qualify for tax benefits, which can enhance your overall return.
For instance, you may be able to deduct property taxes or receive tax-free profits within a Roth IRA.
Inflation Hedge: Real assets like land historically perform well during inflationary periods.
As the cost of goods and services rises, so does the value of tangible property.
What the Process for Land Investing Looks Like
Research: Identify high-growth areas, assess zoning laws, and understand local development plans.
Look at demographic trends, job growth, and planned infrastructure.
You also want to find deals and that is where good research comes in.
Financing: Decide whether to use personal funds, loans, or tax-advantaged accounts like a self-directed Roth IRA.
Using a Roth IRA allows for tax-free growth and withdrawals.
It’s an incredible strategy that I’ll go into more detail on later in this article.
Acquisition: Negotiate and purchase land at a competitive price.
Ensure you conduct thorough due diligence, including title searches and environmental assessments.
This is possibly the most important step of all of it.
If you buy a property wrong (i.e. pay too much) then it will be very difficult to make a profit.
Hold or Improve: Either hold the land for appreciation or add value through zoning changes or minor improvements.
Land value can be increased by obtaining development approvals or improving access.
Sell or Lease: Sell the land for a profit or lease it for ongoing cash flow.
Leasing agricultural or commercial land can provide a steady income while you wait for appreciation.
What Taxes Need to Be Paid When You Flip Land
When you flip land, several taxes may apply depending on how long you hold the property and your investment structure.
I am not a tax specialist so don’t take this section as authoritative (or any of my content for that matter… always do your own research).
Here are some taxes to be aware of:
- Capital Gains Tax: If you hold the land for less than a year, short-term capital gains are taxed as ordinary income. Long-term capital gains (held over a year) are taxed at reduced rates of 0%, 15%, or 20%, depending on your income level.
- Self-Employment Tax: If you flip land as part of a business, you may be subject to self-employment taxes, which include Social Security and Medicare contributions.
- State Taxes: Certain states impose additional taxes on real estate profits. Be aware of local regulations and potential transfer taxes.
- 1031 Exchange: You may defer taxes by reinvesting profits through a 1031 exchange, provided you follow IRS guidelines and reinvest in like-kind property.
Using a self-directed Roth IRA to invest in land can provide substantial tax benefits by allowing gains to grow tax-free.
You basically wouldn’t have to pay taxes on any of it as long as you wait until the right time to take it out.
What Is a Roth IRA?
A Roth IRA is an individual retirement account where you contribute post-tax income (meaning the money you have put in has already been taxed… so you won’t pay taxes again on your gains or profits).
The primary benefits include:
- Tax-Free Growth: Investments within the account grow without being subject to annual taxes, allowing for compounded growth over time.
- Tax-Free Withdrawals: Qualified withdrawals after age 59 ½ are tax-free, provided the account has been open for at least five years.
- No Required Minimum Distributions (RMDs): Unlike traditional IRAs, you are not required to withdraw funds during your lifetime, allowing for continued tax-free growth.
- Contribution Limits: As of 2024, the annual contribution limit is $7,000 ($8,000 if you are age 50 or older).
What Is a Self-Directed Roth IRA?
A self-directed Roth IRA is a specialized retirement account that allows you to invest in a broader range of assets beyond traditional stocks and bonds, including:
- Real estate (including land)
- Precious metals
- Private businesses
- Cryptocurrency
- Tax liens
This flexibility provides more control over your retirement savings and allows you to leverage alternative investments like land for higher returns.
For the purposes of this article, we’re going to assume you want to invest in land in your self-directed roth IRA.
How to Invest in Land with a Self-Directed Roth IRA
Open a Self-Directed Roth IRA: Choose a custodian specializing in self-directed accounts.
Ensure the custodian allows real estate investments.
Fund Your Account: Transfer funds from an existing Roth IRA or make new contributions (subject to annual limits).
Rollovers from other retirement accounts may also be possible.
Identify Land Opportunities: Conduct thorough research to find suitable land investments.
Consider market trends, zoning, and potential for future development.
Purchase Land Through the IRA: The IRA, not you personally, must purchase the property.
All expenses (taxes, fees) and profits must flow through the IRA.
This is important. You want to make sure you have enough in your Roth to pay the taxes or you’ll need to make sure you’re not over your annual contribution so you can add funds to your Roth and then pay the taxes from that.
Manage and Sell: Hold the land for appreciation or sell it tax-free within the IRA.
Ensure all transactions are documented to comply with IRS regulations.
Why Investing in Land Inside a Self-Directed Roth IRA Is a Great Strategy
Tax-Free Profits: All appreciation and sales profits within the IRA are tax-free, maximizing returns over time.
Diversification: Adding land to your retirement portfolio reduces reliance on volatile stock markets and provides tangible asset exposure.
Long-Term Growth: Land is a tangible, appreciating asset that can provide substantial returns over time.
It can be a low-risk addition to your retirement strategy.
Estate Planning Benefits: Assets within a Roth IRA can be passed to heirs tax-free under current laws, allowing you to build a lasting financial legacy.
Compound Growth: By reinvesting proceeds within the IRA, you can benefit from exponential, tax-free growth.
Investing in land through a self-directed Roth IRA combines the appreciation potential of real estate with the tax advantages of a Roth IRA.
By understanding the process and benefits, you can leverage this powerful wealth-building strategy to secure your financial future.
Drawbacks to Land Investing Inside a Roth IRA.
There are 2 big drawback to investing in land inside of your Roth IRA though and you need to be aware of them.
1) Buying/Selling is More Complicated
You’ll have to check with your custodian of your Self-directed Roth IRA but it may be a little more complicated to buy and sell the land simply because there are some more rules and red tape.
I’m not sure though because I haven’t actually done this yet (it’s in the 10 year plan – LOL).
It may be as simple as getting your own checkbook for your Roth IRA and maybe you just write a check like you would at a normal closing.
Again, check with the custodian of your self-directed Roth.
2) You Can’t Access Your Profits for Marketing
One of the ways I learned to find deals is by using tax records and mailing owners of the land a letter saying you’re interested in buying their property.
This can be expensive and using profits from each land flip to fund the next marketing campaign is helpful.
If you open a self-directed Roth I don’t think you would be able to do this because you can’t access your profits without penalties until you’re at the proper age (59.5) and the account has been open for five years.
Of course that goes out the window if you have had the account for the required five years and you’re at the age you can withdraw without penalty.
So that is kind of my plan.
I’m learning land investing and making money now.
When I get a little older I’ll open an account and probably buy my best deals inside that account so I don’t have to pay taxes on the massive gains.
When I get to retirement, hopefully I’ll have a nice little nest egg I can use for investments and only take out the profit when needed.
That way I can continue to grow my wealth and have something productive to do in retirement without having to pay massive taxes if I have massive success.
The link below is a free webinar by Jack Bosch, who is the mentor that I learned the land investing strategy from.
It’s worth a view:
Other Interesting Articles:
Best Places in the U.S. to invest in Land
Things to Consider BEFORE Investing in Land
How to double $1,000 (Scroll down to the strategy on flipping land – I detail how it works and some of the money I’ve been able to generate)
Land Profit Generator -Jack Bosch (Heavily Discounted!)
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