Entrust Learning Center > Investments > Diversifying Your Portfolio with Land

Diversifying Your Portfolio with Land

Purchasing land using your Entrust self-directed IRA is an easy way to diversify your investment portfolio. It also makes investing in real estate available . . .

By: By: Suzanne Morris

IRA Insight

“Buy land, they are not making it anymore.” -- Mark Twain

Purchasing land using your Entrust self-directed IRA is an easy way to diversify your investment portfolio. It also makes investing in real estate available to those who just started saving and can’t — or don’t want to — obtain financing to purchase a more expensive rental unit.

The process for purchasing developed or undeveloped land using your self-directed IRA is the same as purchasing other real estate. You would first need to identify and initiate a contract to purchase the land in the name of your IRA. You would then submit the Buy Direction Letter and Contract to your local Entrust office. Entrust then coordinates all the closing documents for your review, and finally, the funds are wired from your account to the title company to close.

The Dirt on Buying Dirt

Just as with any other real estate purchase, location is the first and most important consideration. Close proximity to schools, shopping, cinemas and easy highway access or commuter rails will greatly affect the resale value. This is true whether you decide to flip your land in a couple of years to a developer or build on it. The key thing to remember is land that is close to amenities will always command a premium.

Also, research the county’s long-range plans. Find out where the new businesses, parks, roads or schools will be. For example, if the county is planning a six-lane highway next to your property, your resale value could decrease. On the other hand, easy access to a new shopping center could improve your resale value.
The first item on your list should be to look at the county's long-range land-use plan. Areas will be designated for business, residential use of varying densities, agriculture and public use, such as parks and schools. It will also warn you whether a garbage dump or maximum-security prison could become your new neighbor. You can also get great information from the local chamber of commerce and the economic development authority.

Holding Costs

Many people shy away from investing in land because there are costs associated with holding the property, and there is no income coming in from rents to defer these costs. But since you have funded your land using your self-directed IRA, you won’t have to worry about loan payments, only annual property taxes and possibly community association fees.

Community associations set and collect the maintenance fees needed to run neighborhood operations. They may maintain landscaping or recreation centers. The most important function of an association is to enforce deed restrictions.
Deed restrictions are legally binding rules filed with the real property records, which provide for building, maintaining and using the homes in your neighborhood. They control how homes look and what can be done in the subdivision.

Do mandatory fees apply to your plot of land? If so, you’ll have to pay them. If you don’t, the homeowners’ association could put a lien on your property or even foreclose on it.

Building Challenges

For most people, the most critical question to answer before purchasing land is, “Can you build on it?” If the land can’t support a foundation or has no access to a sewage system, it may not have development potential.

Research the soil quality and topography. Damp, moist soil can add significantly to your building costs, and building on hills or steep slopes can be much more expensive. Open up the yellow pages and talk to local builders.

Finally, research road access. If the land isn’t accessible via a public road, you and your neighbors will have to maintain it. Consider the likelihood of floods, heavy rain or snow that could limit road access in the future.

Many neighborhoods also have very specific restrictions. They can include:

• Minimum and maximum square footage of the home
• Exterior requirements
• Roof types: Restrictions can limit roofing choices to tile or concrete, which can add $30,000 - $40,000+ to the cost of the home.
• Fencing: Privacy fencing may be prohibited, or specific materials such as masonry and iron may be required.
• Landscaping: Specific types of trees or draught resistant designs may be mandated.
  

Zoning Considerations & Utilities

Once you’ve determined that you can build on the land, research zoning. If the local zoning ordinances dictate that you can’t build on the land or that your land borders water and is subject to environmental regulations, both may hinder your building plans.

Make sure you verify what utilities are available on your lot and what the approximate costs will be to supply them. Often you will need to bring power from a somewhat distant pole to your lot, dig a well and install a septic system. In many cases, bringing power and water to you lot will greatly increase the value of your land.

It may seem more complicated to purchase land instead of buying a house, but if you keep the above points in mind, it will make it much easier to evaluate this investment opportunity. And as with any investment, it is key that you do your own due diligence and consult with a tax professional or attorney, if necessary.

Suzanne Morris is editor and publisher of the Ideal Investment Report and president of Ideal 4 Investors, an online real estate investors network and a member of the National Real Estate Investors Association. You can contact Suzanne at suzanne@ideal4investors.com or www.ideal4investors.com.

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