As a land investor, you’re probably very interested in large parcels of land.
There is something very exciting about buying a 40, 80, or 160-acre parcel of land.
It’s the land investing version of big-game hunting.
But, bagging that large parcel is not aways a great deal, let me show you why.
Break out the Financial Calculator
First, we are going to have to break out our financial calculators. If you don’t have one, I’d suggest an online version like this one.
Before you break out in a sweat, understand, we are only going to be using a few keys.
N = This is the Term of our sale
i = We will use this to determine our yield
PV = This is the Present Value, in fact, we will enter our investment in the land less the down payment we receive
PMT = This is the payment we receive on a monthly basis
Ready? Let’s Go!
Let’s look at a couple of real deals.
I purchased a 40-acre property for $3,000, sounds great right?
When I sold the property it was on terms, $500 down and $200 per month for 72 months.
Now, let’s take these numbers and enter them into our calculator.
N = 72
PV = -2,500 (This is negative because we paid out money and it’s $2,500 because we paid $3,000 for the land but we received $500 for the down payment from our buyer, therefore, we are out of pocket by $2,500.
PMT = $200 (this is positive because it’s an inflow of money).
Now we need to solve for I, this will tell us our yield on our $2,500 investment.
When I press the i key, it thinks for a while, then it displays 7.97. This means I’m earning 7.97% per month. Next multiply 7.97 by 12 months and you will see that your annual return on this deal is 95.62.
Not a bad deal right?
Now let’s look at another recent deal.
This was a smaller 1-acre property that I purchased for $750.
I received $100 down and $100 per month for the next 24 months.
Let’s head back to the calculator.
N = 24 months
PV = -650.00
PMT = $100
I = 14.82 * 12 = 177.93%
Yep, this is showing you that you earned 177% per year, almost double the larger property.
Yield is extremely important.
If you are not watching that number, you are not properly maximizing your cashflow.
Your job as a land investor is to maximize your portfolio’s return and to deliver incredible yields to your private funds.
Next time you are buying a property, run your numbers the best deals are not always in the larger properties.