raw land investment

What’s It Like Owning Raw Land As An Investment?


2 minute read

August 22, 2018

You know, watching this video does not do justice to the beauty that exists down here in Idaho.

I go through this every single year at this time; I talk about going to Idaho, and people make potato jokes, or ask me what the hell I’m going down there for.  Then there’s the people who ask, “Are you driving?” which clearly shows they have no idea where Idaho actually is.

Well, their loss.

We’re right on the Idaho/Wyoming border, and thus we get the best of both worlds.  My nieces call this place “Wydaho,” and for good reason.

As I said in the video, my father scouted out this humble ski town back in the early 1990’s, and eventually purchased land here in 1998 with the thought of one day building a home.  When the real estate market crashed in the United States in 2008, it was cheaper to buy a house, and the land it was on, than it would have been to actually build a house on the land our family owned.

So for the last ten years, we’ve enjoyed this home in both the winter and summer (as I mentioned in the video, I don’t ski anymore – I’m a summer guy!), and yet the land continues to sit.

But isn’t that what land does?

As investments go, it’s about as boring an investment as you can hold.

But does that matter?

You can “invest” in a painting, and derive pleasure from it.  You own it, you display it, you show it off, and you look at it, every day.

And then some investments can be a pain in the ass, like, say, a multi-unit dwelling.  Fix the leaky sink, listen to the tenant complain, deal with the bounced rent cheque, etc.

So what is the purpose of an investment?

Is it all about the return?

Or is there some portion of the investment that is supposed to be interesting, fun, or enjoyable?

That’s the first question I posed in my video today.

The second has to do with the return.

These parcels of land cost $90,000 each back in 1998.  They’re valued around $350,000 today, each, despite the mix-up in my video (and were probably worth $500,000 before the 2008 market crash).

The FX rate in 1998 between USD/CAD was around $1.38, and it’s around $1.30 today.

The HOA fees on the land is a paltry $39 per month, per parcel.

I think we need to figure out the annualized return on this investment.

Don’t you?

There’s only one problem here, and it’s a big one: I’m supposed to be on vacation.

I have no problem doing the math; that’s not the issue here.  But I owe it to my wife and child to minimize the workload, and so far I’ve failed miserably.

So how about this: the first person to work out the annualized return ears a $100 gift card to Home Depot.

Sound fair?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. JPR

    at 7:07 am

    The annualized return would be around 7.00%.

  2. Ed

    at 8:13 am

    $90,000 at 1.38 exchange= $124,200
    $350,000 at 1.3 exchange= $455,000

    I calculate 6.7% return compounded annually not including the HOA fee.

    1. Ed

      at 8:20 am

      6.51% with no compounding

  3. craijiji

    at 8:18 am

    6.8815% when you factor in the HOA fees.

    1. craijiji

      at 8:22 am

      Forgot the FX component. 6.5965%

      90k @ 1.38 = 124,200
      350k @ 1.3% = 455,000
      (455,000-9360)/124200 = 3.588084
      3.588084^(1/20)-1 = 0.065965

      1. Ed

        at 8:31 am

        you forgot the FX component on the HOA fees 😉

        1. craijiji

          at 8:51 am

          I didn’t forget it, I was too lazy to look up the annual FX rates. But since you called me out on it I went and did it.

          When you factor those in, the annualized rate is 6.5615%

          1. Ed

            at 9:19 am

            Is your name a combination of Craiglist and Kijiji?

          2. craijiji

            at 9:23 am

            Ya it is, good catch. It’s the old email I used when I was selling a lot of things on those websites. I didn’t like the idea of using my real name.

  4. Canucklehead

    at 9:03 am

    USD return: ( (350,000 – 9360) / 90,000 ) ^ (1/20) – 1 = 6.8815%

    FX return: (1.30/1.38) – 1 = -5.797%

    CAD return: 6.4826%

  5. Ralph Cramdown

    at 9:03 am

    I suggest a little more research and critical thinking.
    Subtract 21 years of property tax at about $1k/year = $21,000
    Subtract selling costs. Typical Idaho commission is 5.4%, and David won’t be using Comfree.
    Seriously question the valuation, since similar 7 acre lots in the same survey are listed at less than half of the suggested number, and they’ve all got the same view, because they’re all on the same side of the mountain.

    1. craijiji

      at 9:18 am

      He never said anything about selling the property, so why would selling costs be relevant?

      Also, property taxes in Idaho are assessed based on 100% of the market value of the property at rates that vary by county and TCA. Your estimated amount of $1k/year is far too low. Without knowing the Tax Code Area (TCA) and the annual appraisal it’s not possible to just assume taxes.

      1. Condodweller

        at 9:36 am

        Simple, no sale no return.

        I was also questioning the valuation. I wonder how often there is a demand for a piece of land like that. I mean it’s kind of the reverse of Toronto RE, isn’t it? How often does a Canadian come around and says I would like to have one of those please…

        1. craijiji

          at 9:47 am

          Ya fair enough, I was looking at it from an unrealized gain POV.

      2. Ralph Cramdown

        at 9:43 am

        I got the taxes from a similar nearby listing. You can see the view without the haze/smoke, too. I guess if David’s right about these lots being worth over twice what apparently similar lots are listed at, the taxes would be twice as high as well…

  6. Condodweller

    at 9:23 am

    Anytime you are calculating return on investment you gotta take taxes into consideration. Is there a property tax on land in Idaho? Is your Dad’s marginal tax rate at the time of sale 20.05% or 46.16% ignoring surtaxes? On 7% return if it’s the former you get 3.8% and if it’s the latter you get 5.6%. Also, buying in the US forex makes a huge difference.

    One could get a much better return just by buying a basket of Canadian banks. I would be hard-pressed to come up with a reason for owning raw land with no marginal utility. The only one I can come up with is that it’s illiquid which means it’s great for wealth preservation i.e. you are not likely to sell it to blow the proceeds.

    If I were to invest in land, I would still want to add value by earning some sort of income like buying farmland and leasing it to a farmer or a rancher.

  7. JAsch

    at 10:09 am

    Reading through these replies and making some assumptions based off of them, I’ve come up with this: 4.995%

    – Property value grew/declined on a straight-line bases from 90k to 500k, and then from 500k down to 350k.
    – Property Tax remained constant. Using the rate from a town close to the Idaho/Wyoming border that rate is 0.00562%. I know it wouldn’t not have been constant, but I can’t find historical rates.
    – HOA fees have always been and always will be $39/month
    – Commission on sale of 5.4%
    – The rate in 1998 is no where close to 1.38, not sure where David pulled that number from. The lowest it went was 1.41 and the rate at Dec 31 was north of 1.50. Average was 1.48
    – Actual years of ownership is 21, as the property was owned during 1998

    – Purchase: 90000*1.483612 = 133,525
    – Total HOA (at average annual rate) = (12,280)
    – Total Taxes (at average annual rate) = (41,700)
    – Commission (at YTD annual rate) = 350,000*0.054*1.285439 = (24,295)
    – Value (at YTD annual rate) = 350,000*1.285439 = 449,904
    – Ending value = 449,904 – 24295 – 41,700 – 12,280 = 371,629

    (371,629/133,525)^(1/21)-1 = 4.995%

    1. Condodweller

      at 1:12 pm

      Should we add inflation of around 2% as well or would that be too depressing?

  8. David Fleming

    at 10:27 am

    Well I did say the “first” person to provide the return would win.

    And kudos to JPR, but the answer is approximate, and there’s no calculation. Remember our high school teachers used to say “show your work.”

    I love the teamwork by Ed & craijiji, so I’m going to call them co-winners. And they’ll each get their own $100 Home Depot gift card. Email me directly and I’ll leave one at 290 Merton Street for pickup or mail to you.

    @ Ralph Cramdown

    You are right about the valuation to some extent – there are an absurd number of variables. The $350,000 figure is what our agent down here told us, so who am I to disagree with a real estate agent, right?

    The size of the parcels is of utmost important. A 3.5 acre parcel is not worth 1/2 of a 7-acre parcel. The value goes up as the size goes up, as most people want acerage.

    There’s also an advantage to have two 7-acre parcels side-by-side, which increases the value.

    Then there’s which side of the road the parcel is on, which can affect building. What is the pitch/slope of the lot? That affects building, view, and potentially who or what you can see in front of you. The road is long and winding, so there is a tremendous difference in the views, even though the lots are all technically on the “same” side of the mountain. And the higher up a lot is, the more it’s worth. These are lots 25/24, which are priced a lot higher than, say, lots 6/7.

    There are more variables from what I’m told, but raw land in Idaho is far fro my forte.

    1. Ralph Cramdown

      at 12:21 pm

      Yeah, a bit cheeky of me to question the valuation of the man on the spot after a 1 minute internet search, … but that’s what I do. Rural land is pretty hard to value, and often the only opinion that matters is the one willing to pull out the chequebook.

      Nice country, though. I’ve driven through the Dakotas, Wyoming and Idaho a number of times.

    2. LennyK

      at 4:11 pm

      Ah, the long and winding road. Who wouldn’t want to buy there?

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