If you’re interested in getting started in real estate investing, you’ll soon discover that there are so many different ways to get involved. Maybe you’re a seasoned real estate investor and are looking to see how the type of real estate investing that you concentrate on compares to the land flipping model. We’re going to take a look at some of the most popular areas of real estate investing and compare that with land flipping. So if you’re ready to learn, go ahead and buckle in, and let’s get started.
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Flipping Vacant Land
Flipping vacant land is one of the best ways to make money in real estate. However, many people including experienced real estate investors are somewhat confused about the whole concept of flipping land. And it’s no wonder since it is one of the least talked about segments of real estate investing.
Although there are dozens of television shows centered around fixing and flipping homes and other types of real estate, you hardly ever see any shows focused on the topic of land investing. I guess you can say it’s not nearly as sexy as home renovations or the like, but I’m here to tell you that it’s definitely much more profitable.
The general idea behind flipping vacant land is that you purchase the land at a discount, generally at 30 to 50% of market value, and then immediately market it online or listed in the Multiple Listing Service, MLS at a price that is slightly below market value. Now, there is a lot that needs to go on behind the scenes from the initial purchase stage to the final sale phase. But this is the simple concept behind buying and flipping vacant land.
As you can imagine if you’re able to purchase properties at a substantial discount, and then be able to sell it at or near market value in a relatively short period of time, then you can see that the profit potential is quite substantial. Let’s take an example of a common scenario when flipping land. Let’s say you’re able to secure a vacant land deal for $20,000. You have studied the surrounding market and have concluded that the market value of the property is approximately $50,000.
Doing some quick math, we can see that if these numbers hold true then we will be purchasing the property at 40% of market value. If we estimate that we will sell the property at 10% below market value than we would anticipate a sales price of $45,000. If we use a real estate agent and pay a 10% commission on the sale, then we would deduct $4500 from $45,000 to arrive at 41,500. Let’s add in title and escrow costs for both the buy and sell side and approximate that to about $1500 total. Now we are down to about $40,000 even as the net sale price.
So based on our initial acquisition price of $20,000 and a net sales price of $40,000, our net profit would be $20,000 on the deal. This is a 100% ROI. And if take six months to sell the property, then our annualized ROI would be 200%. Where can you get those types of returns on a property investment on a consistent basis?
There are many other benefits to flipping land aside from the pure profit potential. We’ll get more into this as we begin to compare land flipping versus other types of real estate investments. So, let’s get going…
Flipping Land vs Flipping Houses
Now that you have a basic understanding of the land flipping model, let’s compare and contrast that to other types of real estate investing. Let’s start by taking a look at how flipping land compares to flipping houses. There are several reasons why land flipping is better than flipping houses.
Land flipping offers a much better return on investment. As illustrated in our earlier discussion it is not uncommon at all to generate an ROI of 100% or more via a land flip. But is that possible in the world of home flipping?
Well, it may be possible on a one off basis, but can it be achieved on a consistent basis? And the answer to that is quite simple. No it cannot. You cannot achieve 100% ROI or even close to that on a typical home flip. On a typical home flip, you may be able to net 25% to 35% if you did everything correctly and didn’t run into any unexpected expenses.
Land flipping is much less capital-intensive than home flipping. Land is much more inexpensive to purchase compared to a Home. This should be obvious to everyone. As a general rule within a subdivision, the cost of the land will generally fall between 20 to 25% of the overall cost of a home. So, for example if most homes within a subdivision are valued at or near $300,000, then you can safely assume that the cost of the land itself is approximately $60,000-$75,000.
Most land is purchased for cash so there is generally no financing involved. Compare that to a typical fix and flip where you would need to put down 20 to 30% and then find a hard money lender or private money lender to finance the rest. Using the example above, if you’re able to purchase a fixer-upper for say $200,000 with the ARV, after repair value of $300,000, then you would likely need to come up with $60,000 or so, and secure financing for the $140,000 balance.
With land flipping there are no headaches or stress involved with trying to secure financing like there is with the typical home flipping model. So the clear winner when comparing flipping land vs flipping homes is….flipping land.
Flipping Land vs Owning Rental Properties
What about tenants, toilets, and termites? You never have to worry about any of these things in the land flipping business. But these are just a few of the headaches that are involved with another popular type of real estate investment strategy; owning rental properties.
One of the biggest drawbacks to owning rental properties is the ongoing management required. The management and maintenance tasks involved in successfully managing a rental property can be quite time-consuming. And if you are a part time rental property owner and have a full time job, this can be even more challenging.
Even if you have a good tenant now, the turnover itself over time in rental properties, makes it inevitable that sooner or later you’re going to have your fair share of tenant headaches.
And similarly, to flipping homes, owning rental properties requires a financing arrangement of one kind or another in most cases. While it’s true that securing traditional financing for rental properties is easier than for rehab properties, both tend to be capital-intensive real estate ventures. And as we demonstrated earlier, land on the other hand, requires much less capital outlay and thus can be acquired with internal funds only.
What about the ability to receive a steady stream of income from a rental property or portfolio of rental properties? Isn’t that a major advantage over a simple land flipping business model? Although this appears attractive at first glance, if you dig deeper into the numbers, you will often find that the excess cash received by most rental property owners after accounting for mortgage, property taxes, and maintenance costs is nothing to write home about.
And the risk is quite high with owning rental properties, particularly if you have an adjustable rate mortgage that resets at a higher interest rate. So when comparing flipping land to owning rental properties, flipping land comes out on top.
Flipping Land vs Real Estate Wholesaling
One strategy that is always touted by some real estate gurus is the idea of wholesaling real estate. Most of the time when real estate wholesaling is mentioned, it is done so in the context of wholesaling houses. So, what exactly does wholesaling houses mean?
Well unlike a house flipper who purchases and takes title to the property and will generally rehab it and put it back on the market for resale, a house wholesaler will have a purchase contract and will try to wholesaler or flip the actual contract. They do not intend to take title to the property, but instead will try to find a buyer before the closing date and assign the contract to this new buyer.
One of the reasons that real estate wholesaling houses is popular is because of the limited capital required to get started in that business. You only need to find a willing seller of the home and then a willing buyer before the closing date. That may sound simple on the surface, however, there are so many things that can and do go wrong when it comes to wholesaling houses.
Not to mention, many states frown upon and actually prohibit wholesaling real estate without a license. In their view, when someone engages in wholesaling a home they are acting as an agent for the seller and thus are required to be licensed.
Aside from the lawful question about whether wholesaling real estate is actually legal in your jurisdiction, this business model itself brings into question some ethical considerations. Specifically, most wholesalers do not disclose that their intention is to find another buyer for the property. And thus they are intentionally or unintentionally misleading the seller about the prospects of actually closing on the property.
For those investors interested in getting involved in real estate, but are working with a very limited budget, there are better options to wholesaling houses. And the best option in my view is land investing.
Although you will need some initial starting capital to get started, that cash outlay is relatively small compared to other types of investments in real estate. If you have access to around $5000 or so, and you can get started with land investing and avoid all of the legal and ethical issues that are common with house wholesaling.
Flipping Land vs Buying REITs
There are essentially two ways that you can own real estate. Either through direct ownership or through ownership of shares in a real estate investment trust, referred to as a REIT. All the different real estate investing strategies that we’ve discussed so far entail your direct ownership in or control of the property. We will now shift gears a little bit and talk about the indirect method of owning real estate through a share interest in a REIT.
A REIT provides some benefits over direct real estate ownership. One of the biggest advantages is that of diversification. By owning shares in a REIT, you are able to get exposure to all the real estate investments within the REIT portfolio. This can help you minimize the risk of holding any single real estate asset.
In addition, a REIT investment is a passive real estate investment model wherein, once you have done your initial due diligence on the REIT, and have allocated your investment within it, you can generally sit back and have the managers of the REIT handle all the management aspects of the real estate portfolio.
This same advantage can also be a disadvantage since there is an inherent lack of control with this investment vehicle. You cannot as an individual investor decide when and how to purchase or dispose of any individual asset within the portfolio. Additionally, REITs have a high correlation with the stock market. And so, when the stock market has an adverse period, the returns in most REITs tend to suffer as well.
And last but not least, the average return from investing in REITs is approximately 9% per year over the last few decades. While this return is respectable considering a fully passive investment, it falls far below what you can reasonably expect from flipping land and turning over that investment. It should be quite obvious that flipping land is much better compared to buying REITs
Flipping Land vs Tax Lien Investing
Before we discuss what tax lien investing is, we need to understand what a tax lien is. In simple terms, a tax lien is a legal claim on past due property taxes that a property owner owes. This lien is recorded in the public records of the county that the property is located in and becomes a matter of public record.
In the case that the County tax collector is unable to resolve these delinquent taxes with the property owner, they may then choose to sell the lien at a public auction. The public auction can be held online or at a physical location.
So, when you purchase a tax lien certificate you are essentially paying the past due taxes along with any other penalty or fees of the delinquent property owner. If and when the owner decides to settle their outstanding property tax liability, he or she would make arrangements with the county to do so.
Once the outstanding liability has been satisfied, the County tax collector will then forward you payment, generally in the form of a check, for the sum that you paid along with the interest accrued. So in short, tax lien investing allows you to earn a rate of interest determined at auction once you have purchased a tax lien certificate.
Tax liens can be a relatively safe investment vehicle for those real estate investors who prefer a more hands-off approach. The main downside with tax lien investing when compared to land investing or many of the other real estate business models we’ve discussed thus far, is the relatively high competition within this space. This area has become particularly more competitive over the last decade or so as more hedge funds and institutions have entered into the space.
The interest rate that can be earned has become progressively lower and lower due to this fierce competition among these larger institutions and players. It’s not an area where a real estate investor can grow a small grub stake into a relatively large one over a short period of time. You guessed it, flipping land beats tax lien investing every time.
Flipping Land vs House Hacking
House hacking is a relatively new form of real estate investing. And it’s something that not too many investors are even aware of. So what is house hacking? Well, house hacking is when you buy a house, usually with a small down payment, and then reside in a certain portion of the home, and rent out the other area to a tenant. The end goal is generally to try and subsidize some your day-to-day living expenses through this arrangement.
As you might imagine, house hacking can come with a whole host of problems that are too numerous to list here. But the most obvious is having to share your living space with other individuals that you may not know very well. And even in the case that your tenants are family or friends, that arrangement can often end badly.
So, it’s very important that anyone considering house hacking as an investment strategy should do some deep soul-searching to ensure that this accommodation fits with their personality and lifestyle.
Another problem with house hacking is that it’s a rather crude type of investment strategy and it does not have the ability to scale. Real estate investors who want to grow their wealth over time need to focus on those strategies, such as land flipping, that can scale quickly so that they can compound their profits over time.
Download the short printable PDF version summarizing the key points of this lesson...
Final Thoughts
We’ve compared how flipping land stacks up verses other form of real estate investing. Land flipping is the best kept secret in real estate investing. The return on investment far exceeds any other type of property ownership that we’ve discussed in this article.
What’s more, the competition within the land flipping business is far less than all the others as well. And the amount of capital needed to get started flipping vacant land makes it an extremely attractive business model for beginning and experienced real estate investors alike.
Vic Patel is a full time land investor and co-founder of Land Dealmaker. He specializes in flipping rural vacant land across the country and teaches others how to start, grow, and scale their land investing business. Make sure to sign up to the Land Dealmaker Email Newsletter where he shares his exclusive land investing tips, strategies, and insights.
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