NOT ALL INVESTMENT RETURNS ARE EQUAL

Exclusive: Jody Tallal on why he prefers to be a land banker vs. land developer

In previous columns, we have been discussing investing in pre-development land, and I have explained the different category of land investors. As I continued my research on investing, I realized that not all returns on investment are equal. Making, say, 20 percent a year on an investment was just part of the true yield equation.

Let me explain. If I make 20 percent a year on a stock portfolio and it takes me four hours a day to plot, follow and trade my portfolio, that is not the same return as if I made 20 percent a year in rental houses and spent only four hours a week managing them. In addition, that would not be the same as if I owned warehouses that only required four hours a month to manage and made the same 20 percent.

With pre-development land, it requires only a few hours of my time a year to manage. I could do a rain dance on the property several hours every day, but that is not going to help its value.

If I acquired my investment property properly, it is going to do whatever it is going to do because of the influence of major market dynamics around it that are outside my control. Therefore, it requires very little of my time to manage, and I am available to acquire and manage much more of it and/or do other things with my time.

If I were to shift my role from land banker to land developer, that means I now have to incur a substantial amount of development debt with personal liability. It additionally means I have to become responsible for day-to-day operational commitments of real estate development.

Because my objectives are that of a pure investor, this extra bit of profits of continuing on from land banker to developer just does not justify or parallel my goals. Please do not interpret this to mean I feel being a developer is inappropriate; it is just that I feel each person needs to determine to what investment camp they wish to belong, and then try to stick to it.

After you have decided on your objectives and strategies, the next step in my real estate acquisition matrix is to identify specific investment criteria. In other words, what kind of land, price, location and terms are you looking for?

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There is an old adage in real estate that says, “The three most important factors in selecting the best property are:

1. Location;

2. Location; and

3. Location.

Nothing has ever been truer when it comes to making a profit in land. “Location” is foremost in importance. Therefore, it is a very important element of our matrix. In my opinion, it is much better to have the primary future corner at a major intersection in a hot market and pay 150 percent of fair market price today than to have a back parcel, irregularly shaped, down the way and only pay 75 percent of the market. The prime corner will make more money every time.

Since land is non-income productive, your only yield comes from appreciation. Since investment return is a product of holding cost, holding period and gross profits, time is one of the key elements.

If a property doubles in value in one year, you make 100 percent growth; if it takes two years to double, you make 50 percent a year; 3 years, 33 1/3 percent per year; etc. The primary corner will usually be the first to develop. Usually, it takes at least another year for the second-best corner to develop. Additionally, it is not uncommon to see the worst of the four corners sit idle for 3-7 years past the development of the first. Therefore, can you see how important being the first to develop is?

The timing of your future sale is a product of your property’s location. Therefore, I try to select the best property with the fewest development flaws.

The next element in the matrix we have already briefly covered. It is the need to be surrounded by major developers and big league investors. I call these people major players. Major players can make an entire market area happen.

As an example, back in 1977, I saw a section of land in far west Plano (north of Dallas, Texas) at the intersection of Preston Road and FM 544. It was more than 20 years away in the Plano development guide back then before the city intended to bring sewer lines to this area. Subsequently, all the property in this area was selling for $5,000 an acre, because it was merely farmland.

The Hunts owned one corner, Sears Roebuck the 110 acres across the street, and several other major players were also in the immediate area. These landowners got together, put up approximately $350 an acre each for the property they owned in the area, ran sewer lines from the plant to service each of their properties – and then donated it all to the city of Plano. Bingo. In one move, property in this area went from $5,000 an acre farmland, 20 years away from development, to $40,000 an acre prime development property. If a group of disjointed Joe speculators owned the majority of the land in this area, they would have had to wait 20 years for something to happen.

In my next column, we will discuss negotiating the best terms to produce the highest yield on your investment.

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