Land Banking as a Retirement Strategy
Land Banking is a term used by both individual investors and corporate land developers. It is the strategy of purchasing a parcel of land and holding (or banking it) it for typically five or more years for future sale or development.Successful land banking requires planning and patience.
The process of Land Banking is divided into three equally important components: Planning Phase, Accumulation Phase and Distribution Phase.
The Planning Phase is based on the premise that the more time you have until your retirement, the better land banking will work for you. The reason is simple: the sooner you start implementing your retirement strategy, the more time the “miracle of compound returns” has to work in your favor. Time is the most important component of any retirement strategy. You cannot buy or trade for more time. That means after careful thought and calculation of your retirement needs and goals, you need document the strategy to get there.
The next step in the Planning Phase is to answer the following questions in order to maximize your return:
- How many parcels should you buy?
- How frequently should I add new parcels to my portfolio?
- When do I plan to start selling the properties?
- What areas should be purchased and what areas avoided?
The answers depend on your personal time limitations, current cash reserves, retirement plans, and leverage capabilities.
The Accumulation Phase is exciting as you begin the search for your first parcel of land and then purchase it with available cash reserves or in your Self-Directed IRA or 401k. You continue this same process over a pre-determined number of times and then the waiting period begins. Based on the property location and price, it may make sense to add a parcel to your portfolio every year, every two to three years, or still whenever you find the right bargain or opportunity.
Patient land bankers will consistently find good properties at good solid values. There is no need to panic or overpay! Again time is on your side when you plan ahead. The Distribution Phase starts at the time your “golden years” begin. This phase isn’t as simple as accumulating properties, but it definitely is more enjoyable as you start to reap the rewards of your strategic planning. This means that if you had six properties all six be sold during the first 10 to 12 years or so of your retirement. If you don’t want to delay your payout, then put all of your properties on the market at once. Another option would be to start selling your properties a couple years before you retire. The possible benefit of selling one property at a time is that market values could potentially go up. When you are closing in on your retirement, you need to develop a selling strategy based upon your revised needs and goals, health, and current market conditions. Your optimal goal would be to sell your property to an end user, such as a residential or commercial developer. If this happens, you will usually experience substantial appreciation in your property.
Things which can happen to your property, over the years, to increase its value, could be, but are not limited to:
- Rezoned to a more valuable zoning (i.e. from agricultural to industrial).
- The zone density gets increased (i.e. your property goes from one house per acre to a zoning for three to four houses per acre).
- Paved roads and or utilities start moving closer to your property.
- New and major projects get announced near your property.
- Population growth which increases demand for land and increases land values.
The most important component in an area like the Antelope Valley that determines future land values, lies in the answers to questions such as:
- Will the Antelope Valley continue to grow?
- At what rate will it grow?
- Is it possible, beyond the year 2008, that the Antelope Valley’s growth could go parabolic?
- Will residents of the Antelope Valley one day find that they are now bigger than the San Fernando Valley, as oft has been predicted?
In conclusion, no one has a crystal ball to look into the future with perfect clarity. What we do know is that California, by choice, is the most desired place to live in the U.S. In California, Los Angeles County is the most populous—therefore the most highly desired, place to live and work. But Los Angeles County is running out of area to grow. The Antelope Valley has the current solution to a future problem: an abundance of relatively cheap and affordable land. The Antelope Valley comprises of over 3,000 acres and 49% of all the land in Los Angeles County. Therefore, we believe property in the Antelope Valley is perfect for land banking!
