Land vs. Improved Land
by Paola Breda for
September, 2006
Many people who invest in real estate are afraid to purchase land: they think of it as gambling. And, to some degree, it is. But the gamble is educated - it’s not a just a game of
blackjack. Land purchase is also obviously not a great cash flow producer - instead it’s a cash flow sucker. You buy the land, pay the down payment, which only
if it’s waterfront, you
might be lucky and it’ll be fifty percent. Otherwise, you’re buying it for cash. And, who has the cash?
Large developers who are not buying just a lot, but rather a large tract of undeveloped (unserviced) land, generally take a vendor take back mortgage or a special land acquisition
mortgage for development purposes. These are hard to get however, and so most people are content to buy improved land: something with a building on it.
But, what if you’re thinking was a little more developed? What if instead of working like a developer (you know we’re ‘little potatoes’), you bought a small lot in an ‘up and
coming’ town in Ontario? In fact, in some places, judging by lots listed on the Internet, you’ll see that there are some vendors willing to take back a mortgage, which means you don’
t pay upfront for the lot - just a portion in downpayment to show good faith; there goes your ‘no cash’ problem. The vendor holds the mortgage on the land, which you pay monthly.
Often, you can find a lot in a small town in Ontario for under 30k. Then, you immediately decided to construct a house on it with a construction loan. Presto, within months you have
a new home and the land has been improved! You’ll probably immediately jump to the conclusion that you can’t build something because you’re not a builder. Well, why not? You’
re not going to do the actual building and there are companies who specialize in selling you a set of plans, and some who even sell you all the pieces of a home, like Viceroy Homes,
for example. They’ll even find you someone to build it. All you have to do is finance the project. Of course, your bank says no, but why stop there? There are all kinds of financing
programs out there today who will finance your construction loan. Then of course, you’ll hear from your lawyer or your sister-in-law that you shouldn’t pay those exorbitant 14%
interest rates. What they’re forgetting of course, is that the interest is only on the amount funded at each stage. You’re only borrowing whatever’s completed by that time and the
whole project should take less than six months. So, if you dollar cost averaged your payments, it would probably be the same as paying interest on the entire amount at 8%! (Except
for the fact that you don’t have the finished product during that time.)
Well, you’re still too scared. After all, you’ve never built a house before and you’re working full-time, and all the other excuses you can think of to obstaclize your idea development.
Well then, why not finance a prefab home? There are countless prefab home builders across Ontario, and you can pick your home, size and features from a set of plans and pre-order it.
It’ll take a few weeks, then it’ll arrive in pieces and be placed with cranes on your basement. If you financed that, it would only be less than 2 months.
Either way, once you’re done, you have something that’s worth much more than the sum of the lot, the home and the fees (lawyers, interest charges, closing costs, taxes, etc.) You
have instant equity! Now, you just turn around and have it appraised and get the bank to pay off your construction loan (of course, now they’ll agree because you already have the
product completed, so there’s no ‘unimproved land’, and they’ll give you 75% - maybe the 75% of the finished appraised value is actually equal to or more than what you dished out
in land purchase and building. You’ve just made yourself a chunk of cash!
Wait! We’re not finished. Then you can turn around and apply the lease-to-own strategies talked about in other articles or, if it will cash flow well, you can rent the property out and
let the tenants pay off your mortgage.
Happy Investing! Happy Creative Thinking!