Want to buy land, but questions on IRA

At your age, maxing out the IRA options and any 401K or similar plans is the best thing you can do. Every dollar that you put away in your 20's is with $10 in your 30's, worth $100 in your

40's, worth $1,000 in your 50's, worth $10,000 in your 60's, and worth $100,000 in your 70's.

You might think that plus or minus a dollar here and there doesn't mean much right now. After all, you are young, life is long. But those are exactly the two factors that make ever dollar right now so critical. Making a $1 dollar decision today is the same as making a $1-million dollar decision when you are

85 years old.

You don't want to raid your IRAs. The value of the growth over the next 40 years will be far more valuable than any piece of land. You are making a multi-million dollar decision here, so don't blow it.

Three points of advice:

1) get your IRA money working harder. A fixed rate of return is only going to just keep up with inflation over the years. You need more horsepower than that. Invest in the market. It should average 11% for you over time, if history means anything. Over the life of your IRA, that will again be the difference of at least a million dollars.

2) land is a very poor investment. It almost never pans out, and it costs a lot to carry it. But if you understand that going in, that you will only use it for fun and never get anything else out of it, that is OK. Keep your credit solid and buy the land with a loan when the time comes. Don't raid your IRAs or 401Ks.

3) if your job doesn't offer a 401K or similar program, start looking for a job that does. Again, that is a million dollar issue over your lifetime.

-john-

John, forgot to ask, but why is land such a poor investment? By me, the prices are double each year and the realtors are just laughing all the way to the bank. Here's a quote I stole from some realtor who left a comment on someone else's blog:

"I am on the XXX City Council and have heard rumors of a 1700 ac. property selling for as much as $45,000-$50,000 per acre, in the SE part of the county. We have sold smaller ranches in the $5,000-$10,000 p.a. range. We can't keep anything in our inventory, although there are a few of those sleepers that have not sold the way they should, but certainly, their time is coming....."

..."But try and find something on it for sale and you'll find real quick that there aren't any deals unless you are the seller. The folks are willing to pay the prices, no matter how outrageous."

It's true, in my area, you can't find land for anything less than 5k an acre and with the population growth in the area, people are dying to get away from the city (so am I).

Seriously, is land such a bad investment? My main goal for this is for recreational use, but of course, if it's worth something when i'm 60 years old, then all the better.

Thanks John, Yes, I agree with you and I was thinking of putting more power into the IRA and not touching it. I don't have a 401K because I work for myself, my income increases every year, but slowly. The thing about my current Roth IRA is that it's one of those "lifecycle" packages from Vanguard. I think it's called the Vanguard Target Retirement account and mine is set for 2047 i think, I'll have to double check. Anyways, it just sucks watching the numbers grow so slow...sometimes $10...other times $100...but it seems that it's on average with the money market accounts.

What other things do you suggest I invest in?

How do you figure this? 10x return in ten years is roughly a 30% return on investment.

-- Doug

It looks like he has the right idea, but has greatly exaggerated the effect.

Assuming a return of 10% per year, a single $1.00 invested at age 20 grows to $490.37 at age 85, while $10.00 invested at age 30 grows to $1,890.59 at age 85, and $100.00 invested at age 40 grows to $7,289.05 at age 85.

So, the age 40 investor receives 14.86 times the return of the age 20 investor, but he invested 100 times as much. The age 30 investor receives 3.86 times the return of the age 20 investor, but he invested

10 times as much.

At 5% per year, the totals are $23.84, $146.36, and $898.50

The age 40 investor now receives 37.69 times the return of the age 20 investor. The age 30 investor receives 6.14 times the return of the age 20 investor.

At 1% per year, the totals are $1.91, $17.29, and $156.48

The age 40 investor now receives 81.93 times the return of the age 20 investor. The age 30 investor receives 9.05 times the return of the age 20 investor.

I have to agree with John here. Investments can have a recurring return (interest, dividend, rent, grazing fee, sharecropping fee) or a one time return (appreciation). Your investment seems to be only looking for appreciation. Not only do you lose the value of your initial investment, you will be paying property taxes and other expenses every year on it. These are funds you could have invested for a return. You also have the liability of a land owner that someone will get hurt on your land. Nobody every broke a leg tripping over the S&P500 index fund.

On the good side, you are doing an excellent job socking money away. So live a little. If you want to get some experience with real estate and with enjoy the land somehow (camper on the pickup truck and dirt bike?), why not go for it. It's exciting thinking you may double your money in a few years. But with experience you may regret the lack of recurring revenue.

Keep Up the Good Work!

If you are self-employeed, then you have an opportunity to use one of the single best tax strategies ever invented. It is called the SEP plan. If you don't have a SEP (or a Simple), then run down to your broker or financial planner and get one right now today. If you don't have a broker or planner, then get one of them, too. SEP plans let you put a way a huge amount of money each year, far more than an IRA. And the way taxes work, the government kicks in $1 for every $2 that you put in. That is absolutely free money that you would otherwise pay in taxes. Don't pass this one up.

-john-

Land eats. It eats taxes, insurance, and upkeep. It presents a liability. And it doesn't have a rate of return. It just sits there doing nothing but eating.

You do hear about people who sell their farm for $1-million an acre or have a Wal-Mart built across the street. But just as often, you hear about someone who was the next section from the new subdivision, and they waited all of their life, and the city never grew to take them over. You cannot predict what is going to happen here, it is all luck.

Others have done studies on land values and housing. If land was a good long term investment, it would take very many years before nobody could afford to buy it. Then, buy the laws of supply and demand, the bubble would have to break, and then normal people could buy it again. As a result, the values of land and houses are throttled by what people can afford. If the prices get ahead, like they did in the 2000's, you eventually have a market collapse like we are starting to see today.

-john-

I am scared about land liability...gotta look into that. So if someone trespasses on it, gets hurt, falls, breaks a hand, etc they can sue me?

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Being an airplane fanatic myself, I now understand.

I don't have a problem with you buying land if you know going into that you buy it as a toy or hobby, and that it has expenses over time. Making money should be incidental, not the reason. The biggest point that I wanted to make is that you go into it with your eyes wide open.

Just look at all the folks that bought condos in pre-construction hoping to flip them for an east $50K or $100K, and now they are upside down by over $100K with no buyers, and they are stuck with the high payments. Those people were blinded by the hype, and many will lose their pants in the deal. I didn't want you to go into this thinking you would make a killing on the deal.

Since you are a creative go-getter, perhaps you can find ways to make some money off of this land. Leasing hunting rights might be one way. Or leasing space for others to put up T-hangers. Or getting into the horse boarding business. Or putting down some pads for people to lease for RV's.

That is one risk. The idea is to carry insurance. You probably also should have at least $1-million in umbrella policy insurance (the so called Bill Clinton policy since his State Farm umbrella policy paid off one of his bimbo cases). That goes double since you are self employed--being a business person, you are a target.

Another insurance item is to make sure that your vehicle, if you use it for business, is insured for business usage.

-john-

Whenever I'm presented with two good opportunities, each of which is a good long-term bet, I am very happy straddling the fence. So why not do some of both?

My assumption is that you will hold long-term. On the other hand, if you are likely to need this money in a decade or two, I'd probably find something more short-term. One of the best lessons I've learned is to never sell good land or good stocks.

-HW "Skip" Weldon Columbia, SC

In our neck of the woods (Southeast US) a $2M umbrella policies costs me about $300.00 a year. Mine covers the liabilities I am likely to incur should I ever be sued because someone "trespasses on it, gets hurt, falls, breaks a hand, etc".

Just an update on this...it's now become just as easy/cheap to set up a solo-401k plan and I've replaced many SEPs with them. The principal advantage is flexibility with contribution limits. The SEP has that contribution limit of, essentially, 20% of your income, while the solo-401k is $15,500 (for 2007, or $20,500 if over 50) as an "employee deferral" plus that 20% as an employer contribution.

So you can use that higher limit when you want to, or you can keep to the normal SEP limits (or below) when that's your preference. With that extra flexibility, if it works for your business, the solo-ks can really make sense these days.

-Tad

Tad, We have been doing alot of the same when contribution maximization is a primary goal. You mentioned "cheap" with the i401(k). Who's product do you use? The cheapest I have been able to find are around $150-$250 annually. I realize that is generally a very small percentage of assets (especially if clients are wanting to max contribs), but people compare that to a $25 annual SEP fee and complain to no end.

Just wondering if you have had any luck finding lower annual fees?

Fidelity has a no-fee self-directed brokerage solo 401(k). Only fees are commissions (and then only if you buy commissionable securities). I imagine other brokers have similar offerings.

I custody through Fidelity Institutional so that's where most of these are. As Rich posted, Fidelity retail has a free solo-k offering, they have info on their web site about it (I think he's the one I heard about that from, here on MIFP). Retail had a better offering than institutional for awhile. Feel free to email me if you want to chat about Fido as a custodian, I've used them for about 3 1/2 years.

-Tad

Thanks. May do that in the near future.