Investing in Land Real Estate for Retirement: What You Need To Know

Choosing how to save for retirement can be a decision that takes years. After all, that’s the money that you’ll be living on during your golden years. Most people stick to 401ks and stocks, but what many people don’t know is that you can invest in land real estate to save for retirement. Investing in land real estate can be a great way to save money long-term, but with any investment, you need to know what type of land to invest in, what sort of returns you can expect, and what to avoid when investing in land real estate.

There are many benefits to investing in land real estate. One benefit is that if you invest in land in different areas, you will be protected if certain properties are hit by natural disasters or the value of one type of land real estate drops. Geographic and commodity diversity can keep your money safe even in a rocky market. Another benefit is that land real estate (farmland in particular) sometimes have higher returns than stocks do. Most stocks can be expected to produce a six to seven percent return over time), while farmland has produced a steady 11.5 percent annual return over the past twenty five years.

If you are looking for a low-maintenance investment, vacant land is a great option. It is cheaper to buy than developed land, and you don’t need to spend money doing repairs or renovations. While this is an excellent investment to make in the long-term, you will have to be patient. This investment will take time to make money. You’ll also want to keep an eye on the market to make sure you’ll be able to sell it at the best possible price. Consider looking into vacant land properties in areas that are seeing an increase in population or jobs. This land will is likely to become more desirable over time, and you’ll be able to sell it at a higher price than what you bought it for originally.

When investing or buying vacant land, you should always know who you are buying from.Be careful of people who have only owned the land for a short amount of time and seem very eager to get the land off their hands. Vacant land takes times to accumulate value, so it’s suspicious if people only own it for a short amount of time. The owners might know something about the land that makes it less valuable. This is a perfect example of why it is so important to find an agent with the expertise and experience needed to conduct land real estate transactions – like an Accredited Land Consultant (ALC).

Timberland or forestland are also excellent long-term investments. The returns for timberland real estate tend to move counter cyclically to other markets.  Because of this, it will add portfolio diversification, lowering the risk of losing money. Timber is also a hearty crop that can provide you with returns for many years.

You should invest in timber or forest land only if you are planning to retire ten or more years down the road. You’ll have to spend money to plant trees and won’t get returns as they grow, but once the trees reach maturity, they will provide steady returns.

Although investing in land real estate to save for retirement is an excellent option, there are some key factors to look out for. Keep the following in mind while you look at different properties:

-You need to know the land inside out. You need to know everything about the land you are investing in. This means zoning, mineral rights, any environmental hazards on the land, usage restrictions, access easements, taxes on the property, and the likelihood of natural disasters in the area. If you think you are asking too many questions, you are not. Even small issues can end up costing you a lot in the long term. For example, you could have an incredible property with full mineral rights, but if the soil drainage is poor, the value of the land could drop so dramatically that any other positive factors wouldn’t matter at all. Finding an ALC near you can help ensure that you see the whole picture when it comes to investing in a piece of land.

-You need to be crystal clear on the taxes. This was mentioned in the previous bullet point, but it’s so important we added it again. Some properties have taxes that are so high that the taxes eat up any returns you make on the land. Speak with your land agent about this and make sure you understand what your costs will be before investing in a property.

-Are there wetlands on the property? Thanks to Waters of the US (WOTUS) and other laws, if you have wetlands on your property, huge parts of your land might not be useable. This could cause the value of your land to drop dramatically.

Investing in land real estate can be a great way to save up for retirement. Land real estate is a valuable and limited community that, historically, continually grows in value. If you do your research and spread your investments out over a few different types of land, you could have a successful start to saving and creating a well-balanced, diversified portfolio for your retirement.

About the author: Laura Barker is Marketing Assistant for the REALTORS® Land Institute. She graduated from Clark University in May 2017 and had been with RLI since October 2017.

raw land

How Raw Land Investments Can Equal Retirement Income

Raw land investments can serve many lucrative purposes, but have you considered retirement income among them? From rental properties to fix-and-flips, retirement investors have utilized their business expertise to build a comfortable future. Some investors may not realize that property is a permissible retirement asset, but tax-advantaged savings vehicles like IRAs and 401(k)s can own a house, commercial building, or vacant land the same way they can own stocks. These accounts feature tax benefits that can help offset any tax-related concerns that may otherwise deter a potential real estate investor. Pre-developed land has flown under the radar as a viable option for real estate IRAs, but that has changed rapidly over the last several years. 

The beauty of self-directed retirement lies in the hands-on nature of certain business activities. In the context of a vacant land deal, the roles of the broker and of the investor are virtually the same as a transaction with non-retirement funds. Investors must maintain a degree of distance from their IRA holdings, but they’re still able to establish terms and prepare documentation. IRA holders may even pursue non-recourse financing on behalf of their plans to broaden their purchasing options or compensate for a capital deficiency. 

 Although an IRA—as its own investment entity independent of the IRA holder—is able to invest in raw land, the plan holder must follow certain rules to avoid prohibited transactions and possible tax consequences. If your piece of IRA-owned property needs some measure of work before leasing or selling it, the use of personal funds, assets, or efforts would be limited or restricted. For instance, your IRA may own a plot that you’d like to lease as farmland, but there’s a dilapidated barn that has to be removed before you can proceed. Because your retirement plan owns the land, you may not pay for the barn’s demolition and removal with your own money, nor may you fire up a bulldozer to knock it down yourself. Any and all expenses inherent to the development, maintenance, or repair of the property must be covered with IRA funds.  

 In maintaining suitable distance from their retirement assets, investors must also be careful not to conduct IRA business with disqualified persons. Such individuals include anyone in the plan holder’s direct familial lineage or their spouses (daughter, father, son-in-law, etc.) and any individuals with fiduciary responsibilities to the IRA. Non-lineal family members like siblings, existing business partners, or trusted friends are non-disqualified persons and may therefore interact with the IRA more directly. They can provide repair services, serve as property managers, or even take up residence as your tenants. Concerns regarding disqualified persons revolve around the separation of one’s personal funds from his or her retirement dollars. IRAs and other such accounts provide significant benefits, so it’s important that tax-advantaged income never reaches the personal bank accounts of plan holders. 

 That being said, disqualified persons are not 100% prohibited from getting involved with IRA-owned assets. Keeping the money separate may prove especially challenging under these circumstances, but partnering with disqualified persons is certainly possible. Let’s review a few example scenarios that may arise when a self-directed retirement plan and a disqualified person work together on a vacant land investment: 

  • Your IRA and your father own a piece of raw land together, each with a 50% equity share. 
  • If you both decide to sell the property, you would each receive 50% of the sale proceeds in accordance with your ownership percentages. Any other income from the asset would be distributed evenly in the same fashion.   
  • Let’s say you elect to sell your IRA’s portion but your father wants to keep his. This is perfectly allowable as long as the IRA portion isn’t sold to a disqualified person (including you). 
  • If you decide to build a residential or commercial property, all expenses would have to be covered in equal amounts. Both parties could pay no more or less than 50% of any applicable costs. 
  • Just as you wouldn’t be able to retain your IRA’s money on a personal basis, your father could not accept income credited to your IRA.  

Whether you go in alone or pursue an investment with a series of partners, a raw land investment with a self-directed IRA is worth considering. The same approaches that you’ve already mastered—hold and flip, land leasing, construction, etc.—can be applied to assume genuine control over your retirement. Your IRA has the opportunity to yield the same profits that you’ve come to enjoy with your personal pursuits, all while garnering the tax-deferred or tax-free benefits that are only available through retirement investing. A growing marketplace of offerings, expanding technology, and a new breed of IRA providers that specialize in alternative assets like raw land are making it easier than ever for real estate investors to make a virtually seamless transition into this arena. 
About the Author: Bill Humphrey is co-founder and CEO of New Direction IRA, a provider of self-directed retirement plans. With over 20 years of experience as a certified public accountant, Mr. Humphrey has broadened his expertise to include real estate and other alternative retirement holdings. Since 2003, New Direction IRA has provided administrative services for thousands of alternative investments in IRAs, 401(k)s, and health savings accounts.