Buy Property in the Path of Growth
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2005
When you buy property in the path of growth - and you time
it right - you can see large gains in value in a year. On the
other hand, if you get the timing wrong, you might have to sit
on a property for years without sufficient income to cover your
holding costs.
There are reasons why towns have to grow in certain directions.
Sometimes it is a matter of geography. It is difficult to put
new buildings on the sides of steep valley walls, or out into
a lake or ocean. Sometimes it is a matter of available land.
If a town is surrounded on three sides by national forest which
cannot be developed, it is easy to see which way the town will
grow.
When a town does start to grow, the property values in the
path of that growth can rise very quickly. This is especially
true if there are few ways for the growth to go, as in the example
with the national forest. Those who own land in the path of the
growth will sometimes see the value of their property double
in just a few years.
The goal with this kind of investing, then, is three-part:
1. Determine if the area is going to grow. Are there new jobs
coming? Is the population already consistently growing? Are there
reasons why more people and businesses will be attracted to the
area soon?
2. Determine the direction of growth. Where is the town already
expanding, and why? What are the reasons why property is more
attractive in one direction versus the others?
3. Buy property in the path of growth, wait for an increase
in value, and sell.
When I lived in Traverse City, Michigan, I watched as some
properties went up by more than 25% per year to the south of
town (that means doubling in value in about three years), while
the general rate of appreciation was less than 10%. With water
on the North side, and subdivisions on the West, the growth was
bound to go South or East.
How to Buy in the Path of Growth
Land is often what is most in demand in the path of growth,
as new businesses come to the area. Many towns only have one
or two major highways, for example, and new businesses want that
exposure. Commercial lots may double in value along such a highway
while one street over the values rise only a little.
The problem with buying for appreciation, however, is twofold.
First, you are always guessing to some extent, as to when the
values will really take off. You might guess that our new lot
will triple in value, and then it does - right after you gave
up and sold it in the fourth year to get your money back. The
second problem is part of the first - you have holding costs
while waiting for your prediction to come true.
The bets way to overcome this may be to stay away from pure
land plays. Land may not provide any income while you wait, and
meanwhile you have to pay property taxes and interest if you
borrowed money to buy it. What is an alternative?
Existing buildings that have income is one way to avoid this
problem. Of course, you may get less appreciation on such properties,
because part of the value is in the building, and it is the land
that is going to increase most in value. But if done right, they
pay for themselves while you wait.
The best examples I remember from Traverse City were properties
that had been zoned commercial along the highway, but had old
mobile homes on them. The mobiles had virtually no value, and
would be hauled away for scrap metal as soon as the ultimate
commercial user bought the land. In the meantime they provided
income.
One piece of land was for sale for $89,000, and just down
the highway a bit from new buildings and businesses going up.
It had three mobile homes on it, which likely rented for $500
per month each. You could even get positive cash flow out of
the property, and it is probably worth $200,000 now.
Buying property in the path of growth is potentially very
profitable - but sometimes risky. Buying properties that pay
for themselves makes it a relatively risk-free strategy.
Copyright Steve Gillman
69 Ways To Make Money In Real Estate
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