What does it entail to invest in land? Where are the opportunities and how can you monetize land investing? We are talking with Ryan Pettitt from Prosperity Aid. He has been a real estate investor over the last ten years, and a land investor over the last five years. He is certified as a Project Manager Professional with PMI and has experience with managing multimillion dollar projects.
Tell us a little bit about you.
I am a business owner and entrepreneur and have invested in real estate for over 10 years, I started off building up a passive portfolio in single family homes, expanded into land, and have been doing that for a little over five years at this point, and most recently, are now pulling all of those pieces together into the syndication round and looking at bigger projects, and bringing in passive investors. I have a certification and am a project management professional with PMI and it serves well with managing multiple projects and initiatives at the same time.
Tell us what your experience has been with regards to investing in land. I'm sure there are multiple levels, and different ways of approaching investing in land. If you don't mind describing what they each are, that would be super helpful.
When we first got started we were introduced to some folks in the industry. One Mark Podolski with the Land Geek, and then also to Jack and Jill with Land Academy, understanding the premise behind investing in land and creating a business around it. And this is undeveloped raw land specifically, and looking for those opportunities to resell and generate cash flow from it. So that's really how we got started with our education, and like any investments, you can either do it actively or passively. So we had the passive experience and our goal was to expand into active investing and creating a business structure around it, so that was the first venture into doing that. But we first got started with finding opportunities to buy vacant land below market value, and find an end buyer and continuing to sell it below that market value to be competitive in the marketplace, and ultimately being able to sell it to them as a flip transaction, or creating cash flow by fronting the capital and collecting monthly payments. So that's how we get started with the business. And then there are opportunities within land to expand beyond just the parcel itself, because you can look at ways that you can turn it into a more productive and sustainable piece of property and doing things like a better use with agriculture, potential developments, a lot of people land bank and so there's a lot of different routes that you can go within the land that can be considered an investment, either from an active or passive standpoint.
What is a land bank?
Land banking is essentially holding on to properties and waiting for the surrounding areas to develop. Essentially deriving the appreciation similar to a residence or commercial property where you're holding it for a period of time. And once that market increases, then you've more value and equity in that property and you could develop it for a better use, or you can also continue to hold it and be able to sell it off at a later date to an end buyer.
Is there a typical amount of years that people wait on that land? And I'm sure that varies greatly.
It varies by marketplace and it depends on what your strategy is. A lot of times you're looking at areas that are in rural markets, or outside of secondary or tertiary areas in which you could find a property and it's in somewhat of a proximity to a metropolitan area. But it depends on how long it takes that growth curve and people expanding out. And so as folks are expanding and those boundaries increase, that's when you start to see that equity and that appreciation in that property.
Are there any tax advantages of holding land, as there are with commercial properties?
If you talk about land itself, it's actually not an incentivized asset, you can't collect appreciation on it. And the purpose of the land being vacant is that there are no structures on it. So there's nothing that you could utilize from a taxation standpoint. However, as you look into different opportunities to change the use or classification, for example agriculture, you can always make those improvements to the land and create some tax incentives. Right now, there's actually a huge push in the marketplace to continue to focus on agricultural land, farming use because of the need of our surrounding communities and access to those fresh fruits and vegetables. The government is actually providing grants and low interest loans as an incentive to develop those properties and create something that is sustainable. The land itself is not but then you change it into a better use, and then you can realize some tax advantages from that.
In terms of that entitlement process, and I'm aware that your way of investing is different, you're buying and selling right away, but if someone were to do some entitlements, how does that work with regards to land?
We do hold on to some of the properties and not all of them are sold immediately, but the nice thing is that for land that doesn't have any structure on it, there's a smaller likelihood that there are any liens or encumbrances on the property. And that's because there has not been any improvements or any structures placed on the property where an entity could place that lien against it. A title search is pretty easy. We actually utilize a subscription service to do that research, and also we have relationships directly with the counties to make sure that the title is free and clear, and the ability to transfer. When we transfer a property into our business entity, we do it through a warranty deed process, and then if we were to resell it, we do a special warranty deed, making sure that all of the title is clear and that it's transferred free from any of those liens or encumbrances, and ensuring that that process is finalized. And if there is an end buyer, that they are completely safe, satisfied, and have that full ownership of the property.
Can you give us a day in your life in terms of what you do on a daily basis with this form of investment?
There are three different components to business and we break it down between sales and marketing, operations, finance, and legal. Our team consists of myself and Kurtis overseeing the full picture and the operations of the business. And then we also have a full time manager and some some part time support as well. It is fully operated as a business and making sure that we have the proper structure and third party support, including things like bookkeeping, and our legal team in place. There's a lot of work that happens and discussions with the county on a day by day basis. Each market is a little bit different, as well as with both the sellers as well as buyers, so those conversations to make sure that we find a mutually beneficial solution for all parties that are involved. We've the systems and processes in place to ensure that we're capturing details through a CRM, and able to be effective in what needs to be transferred and where we're at in the lifecycle of a particular property.
When you have so many transactions going, do you need to have your own real estate license? Do you need to work with a broker? How do you deal with that?
We have actually purposefully not gotten our license because that's something that you are restricted on the types of transactions that you can do with having your brokerage license. We go out to the marketplace as a business and introduce ourselves as investors, understanding that we have to follow certain procedures. That's one of the reasons that if we end up selling a property at anytime, we always transfer that property into our business entity name before it goes to that end buyer to make sure that there's that transaction from the first party through us and into the final party. With that, we were not required to engage with any agents. We have had folks that have asked to utilize an agent that's not built into our pro forma as we do our acquisitions and sales. And so what we do is say that that has to be handled outside of the transaction, you as the representative need to get compensated and we believe in that but it's not part of our pricing model. So that person will need to work with you directly on what that looks like and how they will be compensated.
Let's say someone is just getting started and looking at potentially investing in land, what are the first few steps that you would recommend someone who would just be starting investing in land?
Education is of the utmost importance. We are in the the Real Estate Guys network and we consider Robert and Russ our mentors. And that's one of their mantras "education for effective action". And so I'd highly encourage folks to listen to podcasts or read books, but also make sure that you start to put action in place. And you can do that by establishing strategic relationships, forming a team and finding mentors because ultimately with a mentor relationship in the real estate investing world, a lot of folks have the abundance mindset and willingness to share so that they can then provide a path for that person to to not make the same mistakes or be able to compress those timeframes and apply to their specific situation. And making that decision whether or not you want to be an active investor versus a passive and how that relates to your investment philosophy. And that just depends on the course that you want to take.
Mentorship is actually a popular question that I get all the time. How did I find my mentor and mentors? And I know that for some people is through relationships, and some people pay for mentorship. How have you gone about finding mentors?
I think the most successful mentor relationships are through relationships, and it's something that needs to happen organically. And it's not necessarily going out and saying, will you be my mentor? It happens over time, and being able to establish that connection and seeing that similar path that you're on as far as where you want to be. So looking out into the future, where do I want to be 5, 10 years from now, you may have that person in your network and where you're striving to go, so start to ask those questions and understand their process, as well as what they've done in order to get where they are at today.
What are the potential downsides of investing in land?
We touched on it a little bit, it's not a tax advantage asset on its own. You have to create those opportunities, and especially as we talk about cashflow, that's not something that resonates with a lot of folks that invest in structures. But you can generate that cash flow by holding that property and being able to collect monthly payments. You're acting as the bank for a buyer or someone that is looking to ultimately transition their property into their name because financing does not exist readily in the marketplace or land.
The other thing is that a lot of folks believe that this can be set up very passively from a business perspective. And I'd say that there are a lot of moving parts and there are a lot of intricacies to the business that it takes some time to establish those structures, those processes, and it's definitely a very active business and a lot involved with it. I would encourage folks to take that into consideration as to what path they want to take, whether it's from an active standpoint or passive, and what that means to them. And if they're looking for passive opportunities, start to establish those strategic relationships with people that are already doing it, which is something that we're currently developing as an opportunity for investors to come in and participate and achieve the cash flow and the benefits from our business without having to set up the active side of the office.
Thank you for touching on that, every single asset class is a lot of hands on, and I appreciate you also elaborating that land is no different than any other asset class. Is there anything else that you think is important for our audience to know?
The opportunities are limitless. I've touched on a few of them, you think about a raw piece of land, and it's not something that is super flashy or sexy for any reason. It's not something you see on HDTV, but there are a lot of opportunities associated with it. So it's changing that mindset and shifting that paradigm of understanding how can you take this asset and create an investment out of it? It's really about structuring it from that mindset of what can you do, what's the opportunity that exists, and figuring out how you can generate cash flow from it.
Ryan Pettitt
ryan@prosperityaid.com