Here at Physician on FIRE, we’re big fans of passive income.
Sometimes that comes from investments, sometimes it comes from real estate in its various forms, and sometimes it comes from a side hustle.
But one aspect of real estate we haven’t devoted a lot of coverage to is undeveloped land. It turns out some in our audience are quite adept at turning raw land into residual income.
In this guest post, we’ll look at how to make a variety of investments in raw land and convert those investments into cash in your pocket every month.
The author of this post is Dave Denniston. He’s a Chartered Financial Analyst (CFA), an author, and an authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He also has one wife, two kids, and a bunny named Black Snow (a much better name than Yellow Snow).
Have you ever been in a place and time where you just weren’t happy with your progress?
Maybe you felt like you were never going to finish your residency or fellowship and you just wanted to start practicing medicine and making the big bucks.
Or maybe you felt like you should be paying your student loans faster and they felt like a ball and chain you were dragging on a monthly basis.
I felt like this too in my life. As a financial advisor, there was a time when I took a lot of risk. This was no small bet. I pushed all the chips I had into the center of the table. As a matter of fact, it was a $1,000,000 bet.
A bet that I made on myself.
You see I made an acquisition of financial planning clients back on August 1st, 2008. Great timing, right?
It was a $1,000,000 acquisition that I put in every single dollar we owned into it. I cashed out all of our retirement accounts. I cashed out the 529 plan we had for our daughter. We had no house debt prior to this acquisition and we levered up to make this purchase.
On top of that, I took out family loans to help finance what we didn’t have in our own assets.
As a result of that decision, I was in the hole with family loans and spent the next decade with my own ball and chain chipping away at those loans.
I was making very good money ($150,000 to $200,000), but I wasn’t making the progress that I wanted.
Financial advising is a very tough business. I love helping people, but I’m not a great sales guy. I’m not some seminar guru. There’s a ton of competition and there are a lot of emotional ups and downs.
So I knew I needed to explore additional venues if I wanted to hit my financial goals sooner than retiring at 60 and becoming financially free and hopefully even reaching FIRE.
I tried an Amazon FBA business.
And then… I found land flipping.
What Is Land Flipping?
The basic concept of land flipping is just like any investment where ideally you buy low and sell high.
In the case of land, I have a number of tools at my disposal to acquire tracts of land. For example, I am acquiring property through mailing the owners, texting the owners, buying at a tax deed auction, subdividing larger tracts, doing minor splits, or foreclosing through tax lien auctions.
If I am doing it right, I should be buying land at 10% to 40% of its market value. In raw returns, not including business expenses, this can lead to very attractive ROI.
It’s definitely as much art as it is science!
What’s so different with land flipping is that I typically DON’T improve the land once I acquire it. Unlike residential real estate flips, there’s usually no additional investment beyond the capital you put into it.
On top of that, when you sell the land, you can make money in two different ways:
- A cash sale
- Owner financing through a land contract or a deed of trust.
Here is the first podcast interview I ever did on the subject. This will walk you through some of the basics.
How I’ve Made Money On Raw Land
One of the most attractive characteristics I found with raw land was the ability to be highly diversified very quickly.
I’ve bought plenty of properties for $500 or $1,000 or $2,000 or $4,000.
This has allowed me to spread out my investment over dozens and dozens of properties.
As we turned around and sold those lots, we’ve often done so through owner financing.
As the owner, I act like the bank where I charge a markup as well as interest.
For example, let’s say I buy a property for $1,000. Then, I mark it up by 300% to $4,000.
On top of the $3,000 markup, if I sell on owner financing, let’s say that I ask for a $600 downpayment ($349 document fee and $251 of equity).
This means I am financing $3,751. Let’s say I do it over 4 years and charge 10% interest. They would pay me $95.14 of principal and interest over 48 months.
Assuming they pay on time for the length of the contract, this is a total of $4,566 in payments on top of the $600 downpayment. A total of $5,166.
The $1,000 investment turned into $5,166 in a mere 4 years.
Note this doesn’t include business expenses- like mailing costs, labor, software, and the like.
It’s an amazing way to multiply and increase my equity in this business.
I’ve done this not once or twice or three times. I’ve been at this for five years now. At the recent apex of my business in August 2022, we had a total of 395 notes.
These 395 notes averaged about $180 per month per note which was about $71,000 each month in residual income.
This business has been such a blessing to me and my family. We paid off one of those huge family loans. We’ve regained all the ground and then some from my acquisition in 2008.
However, it’s not all peaches and cream. There are definitely some cons to land flipping.
The Dark Side of Land Flipping
The financial rewards have been incredible with land flipping. However, realize that this is a business that requires a substantial amount of time.
I’ve invested in learning and coaching and spent countless hours studying markets and comps and marketing.
I’ve invested in staff, about 15 in total, to help carry the load for me so that I can do my financial advising “main gig” on top of my land-flipping business.
On top of that, land flipping is incredibly tax-inefficient. There’s no depreciation. There are not a whole lot of write-offs. Every dollar you make is NOT long-term capital gains. It’s all income.
Also, unlike stocks, bonds, and mutual funds, land is not a liquid asset. You are not guaranteed that you can sell it. In this changing market, land is becoming harder to sell.
Finally, I mentioned all those wonderful notes that are paying me monthly. Those are not meant to last forever- they do have a termination point where the loan is paid in full.
Additionally, from time to time, those lovely notes do default. You have to keep track of late payments and send out paperwork for defaults. They take a good bit of work.
For me, at the end of the day, the pros far outweigh all the cons.
Also, the business is what you make it. You can focus on lower volume and higher dollar transactions to minimize your work.
Consider that more expensive properties attract better buyers on average. Larger notes tend not to default.
I continue to diversify my land flipping business by buying higher dollar as well as lower dollar properties in properties all over the country.
If you want to check out my land business, you can visit the website at www.genfamproperties.com
Final Thoughts On Land Flipping
There are so many different ways that you can generate residual income.
You can start an Amazon FBA business. You can invest in a surgery center. You can buy into a partnership. You can invest in AcreTrader like Physician on FIRE. You can invest into eREITs like Fundrise or RealtyMogul.
What I like about land flipping is that I can control the business. I’m able to control the speed and amount of investment and my business expenses. I can scale it up or scale it down.
There’s no doubt that there is work involved, but it has provided me with considerable freedom, both from a time and a financial perspective.
If you are curious about land flipping and would like to learn more, I’ve interviewed quite a few folks over the years.
- Listen to these interviews with Seth Williams, Justin Silva, and Howard Zonder.
- Also, check out my own review of the Land Geek.
Maybe you are curious to hear step-by-step directions on how land flipping works.
Have you ever flipped raw land before or know somebody who has?
What has their experience been?
What questions do you have about land flipping?
Let me know. I’d love to hear from you. Feel free to e-mail me at [email protected]
If you’ve enjoyed this guest post, you can learn more about Dave’s adventures in illiquid investments & much more nonsense by finding his latest blog post and videos by clicking here.
You can also subscribe to the Freedom Formula for Physicians on Itunes here.
Advisory services through Centurion Financial Strategies, LLC.
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation