What do you mean they are one in the same? Well, with land being the original investment vehicle we are easily able to understand that Dirt = Dollars. In our case, we love recreational land with residential tendencies, which means we like larger acreage parcels of recreational land, that is perfect for building one or more residential dwellings with the majority of them being single family homes.
Why do we like this asset class??? Simple, lending institutions don’t!!! This is especially true with your larger banks who make most of their money on fees, when it comes to lending in today’s exceedingly low interest rate world. Regulators will not allow them to make “bad loans” and with all the other banks racing each other to the bottom when it comes to interest rates, we have a HUGE market that does not provide the necessary loan origination fees, nor total interest earned, worth the risk associated with non-improved land.
An example, there is a beautiful 2 acre lot with a 4 bedroom 3 bath home for sale in Bailey, Colorado listed for $576,000 with a neighboring 2.7 acre vacant lot also listed for sale for $72,000. Which one would you like to lend on if you were the bank? With a 1% loan origination fee for the house we will get $5,760 to originate the loan, and for the lot we will receive $720 in origination fees. Pretty simple math.
What isn’t as simple, is the total amount of money the bank is going to make off of you as the borrower. With a 5% down payment on the house, which can be done because houses are more liquid than land, and only a 4.1% interest rate for 30 years, the bank has the opportunity to make $404,662 in interest alone on a 30 year note.
Take the lot next door, banks want 20% down due to the illiquid asset type. You would think that this is good for the bank and it’s third party asset buyers…but remember, higher principal equals higher interest charges and greater return on investment for the lender. In this case, a $76,000 lot is paid down via a $15,200 down payment, so only a $60,800 loan. Which we are able to charge a higher interest rate at 6% for 20 years. With this loan the lender is only able to make up to $36,772 on their note if the loan goes full term.
A heck of a lot better than that crappy CD you got at that same bank, but not nearly as much with the better asset.
Here at Go West Lands, we see these inefficiencies not as a hindrance, but as THE KEY to our ability to make out sized returns on an asset type that Bank of America or Wells Fargo can’t/or won’t service. The juice is not worth the squeeze to these behemoth lenders, lucky for us, as we will gladly make lemonade.