I have become interested in doing some investing in residential lots. I am new to this, but what I would like to do is purchase some lots in a new development before any houses are up and then sit on them for a while and sell once the neighborhood has become established at a premium price. I want to target the more up scale new developments. I am forming an LLC and have 2 partners in with me and we should have no problem with the financing.
Thats my idea…
What i would like to know is…
has anyone ever done this and how successful was it.
How do i get started?
What are some ways to find out about new developments early so i can get in and buy some lots (presale), so i can get them at a discounted price?
Any info any of you have would be greatly appreciated.
Look up the definition of “Real Estate Developer” by the IRS, and study it carefully as that is exactly what you’ll qualify as. The first downfall of investing in land is that it’s difficult to get financing as it doesnt qualify as a “real estate investment”, as it provides no income. Second downfall is that it cannot be depreciated, and any real estate investor realizes how important depreciation is.
Thirdly, as a Real Estate Developer ALL of the costs in acquiring, holding, and developing your project must be capitalized over either a 27.5 year timeline for residential or 39 year timeline for commercial property (apartments with 5 or more units will qualify as commercial).
In a nutshell this means that your first few years, especially your first year, will be a black hole when it comes to taxes. I would consult with a very good real estate accountant and ask in particular about the tax ramifications of being qualified as a Real Estate Developer. The taxes alone can wipe you out if you do not plan for them.
No, Visual Underworld is wrong. You’re not a Real Estate Developer if you just buy land, do nothing to it, then sell later at a profit. You might be a Real Estate Dealer – which you don’t want to be – depending how long you hold the lots and a number of other factors. Also you may be a Real Estate Professional - which isn’t so bad, but you’d have to spend a lot of time in the business. Best thing is to check with an experienced CPA and hold the lots at least a year.
The bigger problem is with your business model. Land developers in Houston typically sell only to builders, not to speculators. The reasons are complicated but it has to do with the way developers finance wet utilities (i.e. they need to get value in the subdivision, which builders do and speculators don’t). That said, I’ve been in that business for 15 years. It’s possible, but harder than you may think.