May 27, 2010

Real Estate Investing | Should Raw Land Be In A Retirement Account?

As a professional real estate investor, I am constantly being asked about investing in raw land for a retirement program. I was a CFP (Certified Financial Planner) for about 10 years before I retired and I loved financial planning. So, here is my personal take on the question, and it is my personal opinion. In the final analysis it is your money and you can spend it as you want.

I don’t believe raw land has a place in an investment portfolio – period. I understand that some people have made large profits in raw land but generally they had to hold it for many years or they were selling land to investors (or more aptly speculators) for huge mark-ups. I know that land can be approved for purchase in a self-directed retirement plan, but that does not mean it is a viable or safe investment. This simply means that the filing documents to the IRS from a specific trustee requested raw land as an investment option and the IRS did not decline their application.

So what is the problem with raw land? If you make money there is nothing wrong, but the issue I have is the illiquid nature of not being unable to sell it if you need the money. I understand that it may be a very small portion of your portfolio. If that’s true, you are better off putting the same money in an income vehicle and letting it sit.

No one wants to take money out of their retirement plan unnecessarily or before age 59 ˝ to avoid IRS penalties. Unfortunately, the reality is that Americans are cashing in their retirement plans at record numbers because of severe economic conditions. If these unemployed people have to spend their retirement funds they don’t want to hear that their special lot inside a magnificent community can’t be sold except for pennies on the dollar or if at all!

In the early 1970′s a company in Florida was selling raw land by telemarketing to unsuspecting individuals with the promise of making tons of money on the lots. These boiler rooms sold hundreds of millions of dollars of virtually worthless, underwater swamp land to unsuspecting individuals. Many of these people made monthly payments for 20 – 30 years before they just let the properties go back to the mortgage holders.

However, in the past 6 – 8 years investors started buying up these parcels that were actually high and dry because of the Everglades drainage programs. Raw land values went from a few dollars per acre to $40,000 for Ľ acre single-family home lot because of over speculation by investors who couldn’t afford to invest in much more expensive single family homes. Then the correction hit in the past few years and now you can get these same lots for $2,000 or less. What if you had to sell now and had missed the wild speculation because you were waiting for just a few more dollars?

Some die-hards will say that there are no buyers for anything right now but that’s not true. At the right price and condition, you can sell properties and even raw land all day long. But if your timing isn’t exactly perfect, you could have an investment that may have value but if no one is willing to purchase it, it is truly worthless.

In conclusion, all retirement accounts will eventually have to be liquidated for legal reasons, immediate economic needs, or death of the owner. Because of the illiquid market for raw land and from a purely financial planning aspect, raw land is not a prudent investment in one’s retirement account.

Dave Dinkel has been a real estate investor since 1975. Dave’s focus in the past few years is educating the public in a manner that doesn’t’ amount to paying for a master’s degree. Dave’s recent contribution to this end is his e-course called “48 Ways to Create a Massive Buyers List” which can be seen at http://www.MakingaBuyersList.com

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2 Comments on Real Estate Investing | Should Raw Land Be In A Retirement Account? »

May 12, 2011

satarnag @ 2:02 am:

When a property gets foreclosed on, and it's the first lien holder that is doing the foreclosing, then the second and third and fourth (etc.) will get wiped out at the foreclosure auction. What an investor will do is to buy/tie up the property from the defaulting owner and see if he can discount the first and second. The second will most likely agree to a small amount (usually 7-10 percent) because they will lose everything once the property gets foreclosed on. The first will usually accept a 20 percent hit.

Now what you quoted is that the second note holder was stating that he will own the property by buying it from the person in default and take over the first position's loan payments and make it current. Therefore, he is not interested in selling his note to the investors. The investors in that example were idiots for not controling the property first or the owner didn't want to sell. The investors were hoping to buy the second note at a discount and bid at the auction and own the property with at least 15 k equity plus whatever the homeowner had in equity.

You can buy any note by approaching the lending institution that holds the note and making an offer to buy it. You will need cash to do so.

Also, to clear up the quoted reference, you can purchase property "subject to" existing liens/loans. Taking property "subject to" means that you will take over the payments, but the old owner is still responsible for the loan(s). So if you stop paying the mortgage/trust deed, the lending institution will go after the old owner and start foreclosing on the property. Buying property "subject to" existing loans is one way where someone with no money and/or credit can get into a home and own it. The second note holder was buying the property from the defaulting owner using the "subject to" clause.

I either confused you or helped you. Either way, I just saved you hundreds of dollars in late night real estate infomercials!