Real Estate in Its Purest Form

A few weeks ago I drove from Maryland to Florida and back. On long trips, I usually turn onto some two-lane state and county highways. This time, I had a mission: to watch for land on the market and get a sense of whether pure unimproved real estate is a plausible investment.

A few people who invest directly in real estate own all or part of neighborhood retail strips that house beauty salons, pizza parlors and the like. Most direct investors buy condominiums or houses. With houses or apartments the risk is big that you'll constantly be searching for tenants to keep the units filled and spend more time on the property than you want, unless you hire a property-management company for around 8% of the rent. Moreover, although some distressed investors may be trying to unload their properties, prices, based on current rents as a percentage of the gross cash flow, are still high in many places.

But none of this necessarily means that the timing is wrong for all real estate. One of the best-performing types of investment property lately has been land, specifically farmland or rural land that can be used for recreational activities or can be subdivided into parcels for homes with panoramic views.

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The lure of land isn't a temporary phenomenon. Land has long been a desirable holding among long-term buy-and-holders who don't need current income or tax losses and can buy for cash or pay bank-loan installments from current income. Or consider the case of a Kiplinger's reader from northern California who just sought our opinion on a plan to take $125,000 from certificates of deposit and buy additional acreage adjacent to his six-acre country home. The beauty of the reader's plan is that it would combine the intangible value of having the acquired property serve as a buffer against unwanted development with a plan to hold the land for 10 to 20 years and sell it, perhaps in pieces, as a retirement investment.

I posed this situation to a group of financial planners and advisers. I was shocked at the vehemence of their opposition. "I've seen a lot of people lose tons of money in land or get frustrated with the lack of return and get out," says Marc Vorchheimer, a financial adviser in Nanuet, N.Y. Chris Van Slyke, an adviser in La Jolla, Calif., said, "What if this is not a good area long-term? What if there is chemical contamination?"

These and other financial people prefer more liquid and diversified ways to add real estate to a portfolio, namely real estate investment trusts and mutual funds that own REITs and other property-related stocks. I can't argue with REITs or the best of the funds. The ten-year annualized return of REITs is 15%. That's fantastic. But just as there's more to real estate than houses, there's definitely more to real estate investing than securities.

A quick tour

That means back to land. A real estate broker and landowner in Colfax, Cal., Robbie Robinson, says land in the area where he and our aforementioned homeowner live has risen steadily in value for ten years, to as much as $2,000 an acre for raw mountain land and $125,000 for a small building lot. This is in part because of the Sierra-foothills scenery that attracts second-home buyers. The growth of the metropolitan Sacramento area, which is 30 miles away, is also behind the appreciation.

In North Carolina, you hear a similar story. Keith Brouillard, co-owner of Carolina Forestry, a land brokerage in Raleigh, lists tracts for sale ranging from one-acre home sites to 280 acres of timber and hunting land. Most of the property is an hour or less from Raleigh, Durham or Chapel Hill.

Log on to www.carolinaforestry.com and you'll see the panoply of possible land investments. For $20,000 you can get a one-acre site that's ready for a house, with a paved road and electricity easily connected. An expanse of timberland, which can pay you some income over the years but needs more work before you could think of building a house, is $3,000 to $5,000 an acre, depending on size and location. Variations in price also depend on availability of water, whether the soil "perks," meaning that it is suitable for septic systems, and amenities, such as hunting and fishing conditions, lake or river frontage, and privacy. Higher-priced land, which has the better amenities, ready utilities and is nearer to cities and highways, has the most investment potential, Brouillard says. He says that many parcels will sell at full list price within a couple of weeks, and that's without inclusion in the realtors' multiple listing system.

Realtors list land, but some of the best-sounding properties are sold directly by specialized land dealers. McKeough Land Company (www.mckeough.com), a Michigan company, has expanded rapidly the past few years and now sells recreational and second-home land in six states. McKeough buys land (often farms from heirs who don't want to farm) and gets it zoned and partly developed so that it's pretty much all set for buyers to build on the property. The prices vary with views and water frontage. McKeough handles the details, such as zoning matters and making sure the land perks. So it becomes is more like buying a suburban housing lot than a piece of wilderness, even though McKeough's parcels are in rural areas.

Most investment land, however, is sold as is, which is why it's often called "raw." At the B.B. Brooks Ranch near Casper, Wyo., 40-acre sites start for little more than $1,000 an acre, but you will have to pay for wells, sanitation, possibly a generator and other essentials. Unimproved roads provide access to most of the property. Still, since the ranch went on the market in 2005, about 500 parcels have sold, at prices from $37,500 to more than $150,000. The first buyers paid $800 to $900 per acre. Today, the price is closer to $1,100 to $1,200. The few that are left for sale are going fast.

Scarce information

If you think land that raw is dear, a ready-made slice of Western heaven can really cost. A 960-acre Montana spread called Buffalo Jump Ranch, with wildlife, pastureland, mountain views, water and a remodeled four-bedroom house, is on the market for $10 million. That's more than $10,000 an acre.

For most of us, of course, that's a fantasy, and the broker offering it, Country West Ranch & Land, of Bozeman, has a bunch of other, more reasonably priced properties. But none of the easily available information tells you one of the most critical pieces of information: What's happening to the values?

There are no indexes for raw land. Zillow.com doesn't hazard its guesses. Nor are there the press releases and studies that real estate firms and organizations compile about residential housing. That's one of the risks of land as an investment: It's really hard to determine is real value. You can haggle, but it may not be the most informed of haggles.

Wherever you're looking, you can go by assessments. Whether you're in Montana or Wyoming or North Carolina or in your home county, one of your first stops should be the local assessor's office. Real estate agents and brokers are disinclined to talk down property, but in my experience, real estate people who have dealt in land for many years and know a lot of the local shakers are straight shooters. They'll tell you, for example, that in a Gulf of Mexico waterfront area, the best land investments are parcels that have room for larger boats, because rich buyers who pay top dollar and don't think about every buck tend to own bigger boats. In a semi-suburban area around Raleigh, 7% to 8% annual return is a fair guess, figures Keith Brouillard, the Carolina Forestry co-owner. The appreciation may be a little higher for land that's close enough to the cities to attract buyers who want to build family homes and drive to work. More than an hour way from town and the prices (and the taxes) are lower. But there's less of a scarcity factor for more-remote property, so you should figure that the value of the land will appreciate more slowly.

Two other aspects of land investing to consider are financing and foregone income. Land isn't like a house with a traditional mortgage. You can borrow to buy land, but the interest rates are generally a couple of percentage points higher than on buildings and the term may be shorter. Land dealers, like realtors who sell houses, may have relationships with local banks and can help you find the money.

Don't expect as generous a tax deduction on the interest for a loan to buy land. Land loans are treated more like a margin loan on stocks, which means your interest deduction cannot exceed your total investment income in a given year (and some common forms of investment income are ineligible). The best tax advantage to owning land is the same one you get on stocks and funds: Hold it long enough, and any appreciation is considered a long-term capital gain. And, in case you're wondering, land does not depreciate, so you cannot claim any losses from depreciation even if someone builds a power plant across the road.

All of these factors make the financial analysis of a land deal far more complicated than a rental condo. But owning land gives you a lot of flexibility and comes with some terrific intangibles, including a sense that you really own a part of America. As I drove on U.S. 401 in North Carolina between I-95 and Raleigh, I saw a lot of really beautiful tracts for sale, interrupted by little villages with neat stores and little cafes. Who could resist the picture of a custom-built house with green views in every direction, with breakfast on the deck, buffered by acres and acres of nature? It may not be as profitable as a real estate investment trust, but it's a lot more rewarding.