Non traditional investments Q and A
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Over the last week I have gotten several questions regarding my investment strategies. I would be happy to answer your questions if you have any.
I have been active in land investing since I was in high school. I was willed an acreage of farm ground in the midwest. This was during the beginning of the easy money love fest that got us in the situation we are in now. I began aggressively expanding my holdings by borrowing huge sums of money against my existing holdings and the appreciation that had ensued over the real estate bubble. I have expanded investments to include forest land, oil and gas explorations, mining land. I am currently analyzing a timber tract in Alaska that is currently inaccessible.
If you have any questions about investing in land, how I got started, or just any questions in general feel free to ask away.
On oil and gas E&P... - size of the position in your portfolio - types of plays ( nat gas? conventional oil? unconventional? shale?) - outlook on specifically nat gas and its ability to be stored / transported / developed as a viable alternative to crude. - why you chose real assets over publicly traded assets?
Oil and gas currently makes up around 30 to 40% of my portfilio. This varries on a month to month basis depending on the amount that is extracted out of the leases in any given month. The extraction also includes a pro rated lease fee for extration. Back in 2004 I purchased a 700 acre farm acreage in Texas. The land happened to be located on the Barnet Shale. This is how I got into oil and gas, I never really had the intent of getting into Natural gas exploration when I started. I don't do much forcasting for natural gas, I run the depletion numbers on my holdings and forcast the expected life of the wells. Out side of that I haven't had the time to expand my gas holdings. My industy outlook is positive, I like the direction that T. Boone Pickens is moving the industry in. I think that the transportation industy is currently terribly weak and needs to be upgraded to include a network of pipelines before natural gas truely becomes fiesable as a fuel for automobiles.
I prefer real assets over publicly traded assest because I can control them. I can kick a farmer out if I do not like they way he is using the ground. I can choose to allow the forrest to be cut for timber or not. This control is impossible in publicly taded companies and assets.
appreciate it. this thread needs to get front paged
What's your time horizon?
Isn't land historically an awful investment (except during manias)? What justifies you buying land several years after a bubble (low interest rates?)? Are you getting the assets at fire-sale prices? What do the previous owners know that you do not and what is their purpose for selling it to you? Are they strapped for cash?
You're moving from real estate to land because of timber, mineral rights, etc. Do you consider this shift primarily a commodities play?
As I wrote earlier I'm very interested in prices. I research real estate and land as a hobby and am seeing nothing but miracle-price offers (people think their asset is worth close to what it was valued in 2007). I'm curious how much you're able to bargain from the listed price. Personally I'm in no rush to buy because I think real estate and land remains way over priced and I rather be wrong and miss the opportunities than start buying now. Of course if you are getting major discounts then I would have to reconsider.
Well I have never moved from real estate to land. I feel that land offers different opportunities then real estate does. I havent gotten into development land. I stick primarly to land that generates a useable product i.e. farm gound, forrest tracts, oil and gas. Land in general as a buy and hold asset class does generally suck for returns but offers other advantages such as high leverage, tax shelters, and currently low interest. With the current estate tax levels many people are forced to sell family acerages upon the death of the owner. My farm ground in the mid west is on average leased at a rate of $20,000 per 100 acers per year. This alone on nets me a ROI in the neighboorhood of 23% per year. I have leased ground to power companies for the wind projects that are being built in the area, this generally bumps my ROI up 1.5% or so. Leasing ground to power companies has its drawback however. The rent per acre goes up however it makes the surround land harder to farm an therefore it fetches a slightly lower per acre rate. Ownership of some of the windmills will turn over to me after a certian period of time however so will the maintance. I have no idea how this will play out so its still a bit of a gamble but I am willing to take that.
This is an investment that I am comfortable with, just like any investment it is not right for everyone. Right now land is close to 11000 and acre and I feel that this is just to high for a rental basis. Money can still be made at this price if you are actually farming the land.
Interesting... I suppose your intention is more so to collect rent instead of betting on price appreciation of the asset.
I buy stocks because of capital gains, not dividends, so I tend to think in a different way. But yea, collecting rent as well as the potential for the land to appreciate in value may be attractive. Curious how much demand there is for land though, say for farming. Never thought arable land would be scarce in the mid-west.
Besides "striking oil" (or gas in this case) what is your general methodology when sourcing new tracts of land. Do you identify a particular asset first and than search out a piece of land that would fit your criteria or do you look at what is currently on the market and then determine if it would be a good investment?
Both, why limit yourself to just one way? I do have certian assets that I will not buy at this time. For example I refuse to buy redevelopment land. Yes this can provide huge returns if everything works out, however from the research I have done it more often then not fails. Since I refuse to become a part of investment groups it is just too much risk.
I have many family memebers that are farmers and they know that I invest in farm ground, they usually give me a heads up when there is going to be an auction for a prime acreage. I rarely go to the auctions for farm ground, usually a family member bids for me with a set max. The farming community is raelly tight knit and they are all for the most part very wealthy. Outsiders tent to needlessly drive up the bidding as locals would rather the land stay within the community. For the forrest ground and other asset classes I personally go and analyze the tract. With forest ground esp you have to know what you are looking for and it is a necessity to source professionals when it comes to inspecting the health of the tract.
Ranch land is much different then farm land. There will always be someone to rent the farm ground. You are correct however with it being illiquid. It is not hard to sell however it does take time, unlike a round lot of shares which can be sold in a matter of seconds. Also you are assocating the housing buble with land too closely. I saw only a few months of asset depreciation over the entire recession. That was only when the credit markets froze up for a month or so. Also I can get leverage upwards of 100 to 1 if i choose. Granted if you are trying to break into the market you wont get near as high of leverage more likely 25 or 30 to 1.
Really unique and insightful thread, thanks for taking the time heister. How did you get started investing in land while still in highschool? I'd imagine you would have been far too young and under capitalized to invest even if you financed it. Also, since I've rarely stepped out of the city and suburbs, I'm curious as to how you gained your knowledge about land investing and such?
My great grandfather upon his passing willed me around 900 acres of land in the midwest. This was the initial capital I used to finance my projects since then. I bought an acreage in Texas soon after refinancing my willed acreage. That one was 704 acres, paid about 4700 an acre for that. I some how came up with the mineral rights for this property. It was located in the Barnet Shale, provided for one hell of a windfall. I had to have my parents co sign these loans obviously but they had no problem doing that. I now own acreages in Iowa (3 sepearte acreages), Nebraska (2), Texas, Alaska (3 timber tracts). I am currently looking to purchase a 1100 acre timber tract in a currently unaccesable area of Alaska.
I came into my knowledge from my family. We come from the midwest and have been farmers for generations.
How do you feel about railroads in Australia? A resource based economy, with extraordinary demand from China, and valuations pricing growth stocks like distressed assets.
Your asking the wrong guy, I can ask my aunt. She is an exec for UP. I'll get back to you on that.
I'd appreciate it. 50% of my portfolio depends on it and the rest depends on deep, out of the money calls for BAC and GS. This is essentially the only "safe" investment in my portfolio.
But, I don't want to bother you with my positions in financial services. Most people think I'm crazy, and I admit there is a somewhat decent probability that they are right, but I swing for home runs, I have a high risk appetite, and if I am right, I instantly go from college student to liquidation arbitrage expert. If I'm wrong, I'm still young enough to rebuild.
I did some looking into this today. From the people I talked to and what I found it looks like its going to slow down as far as the deamnd from China is concerned. China is finally seeing the consequences of years of overbuilding. When you coupple that with the fact that they have aggressively built up their own natural resource networks, it looks to me like the demand will be droping for the rail in Austrailia. However they still export a huge amount and rail is the most efficent way to move goods across the huge deserts they have. So its kind of a hard guess at this point. My aunt said she would get me so more information on it soon.
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Haha, I'm not offended at all, as a market contrarian my goal is to buy when I believe the maximum number of people disagree with my picks.
Heister, I was in a similar position as you. I did inherit commercial property at a very young age. But too young to do anything let alone manage it. Now that I'm old enough, all I am doing is sitting on mutual funds losing in the stock market! lol
Ive been in a dilemma of wanting to take a risk and invest in property, land, or purchase a small business. I am a college student at the moment so fear I lack experience, or wouldn't be taken too serious. But it seems like you started at a very young age.
My question to you is, how important do you believe experience or formal education is in pursuing such endeavors? Thanks
Experience 90% College 10% (only accounting)
If you ever plan on owning a business I advise majoring in accounting.
This is possibly the most interesting thread I've seen in a while. Investing in real assets seems really cool but I was wondering a few things that I don't think have been addressed.
How do you determine lease values across state line? I would assume farm land in Montana would be different than that in Kansas- if not simply for the different products the land is used for. (I have no knowledge of the market of farmland, so this may be a dumb question)
How do you invest in Oil/Gas properties? I assume that you buy the mineral rights (and land?) , but how do you determine what is a good investment? I also have no idea how you could know about gas/shale/oil and not compete with the oil company that you eventually wish to lease the rights to.
Did you learn all of your methods by yourself/family? Further, do you know of any good resources on the topic so I don't just ask a bunch of questions?
1 That is a very good question, it is based on four main factors. Location, yield per acre, length of growing season, climate. Places like Iowa have a growing season that allows for one staple crop per season where as places like Texas have a season long enough to grow two harvests. However the grain belt has a siginIfantly yield per acre then the south does for grain products.
2 I rarely specificly target gas properties since it is almost impossible to hit windfall profits there anymore. I'll get more into this when I have more time to fully answer it.
3 The method is difficult, it takes real farmers or other experts to truly get a sense for what you are buying. There aren't balance sheets, or income statements that are easy to tell how the land is producing. So it's difficult to value I learned everything I know from family. I still rely on them extensively to locate acreages.
2 Oil and gas exploration is a completely different animal. I lease out my mineral rights to exploration and extraction companies. I don't directly compete with them. I usually take in a 5 figure number per acre for the rights to drill, a percentage of the profits generated from the minerals them selves, and a fee to have the drilling rig on my property along with a slew of other small details here and there regarding the distruction of the land. If I wanted to get into exploration I would have to contact extraction companies to remove the minearls. This is too much of a headache for me.
What's your take on investing in almond farms as an alternative to investing in water?
I do not mess with actual farm opperations if you are talking about buying the land and leasing out the trees you will need to research the almond market. I am not up to date on that industy nor am I current on how you lease fruit and nut bearing trees out.
I avoid water, it has the potential to be a huge money maker in the near future however it also carries enormous legslative risk as it is a public utility and can be regulated to the extent that is essentially becomes nationalized. That is my view on the US water market, overseas it is even worse.
Heister, thanks for creating this blog topic.
What would you recommend to someone who wants to start investing in these types of properties, with limited experience?
Also, can you elaborate on the differences between farming and ranching land?
Farming and ranching generate profits from different business obviously. Also they are usually purchased for different reasons. Farm land is always purchased for a profit generating purpose. Ranchland is purchased for mixed reasons. Such as actual ranching, tax shelters, future development, gas exploration ect ect. Raching will begin to generate more profits in the coming years as the orgainc movement grows and picks up more world wide steam, not that I think this dictates a purchase. In my view ranch land is primarly purchased for apperciation.
I honestly don't know the best way to learn about this market other then just doing it. You can research land rent rates on the internet however these are usually listed by state or region. Rent rates varry greatly with in a reagion or state so you need someone in the area to actually tell you what is a good acreage vs what is over priced.
I would advise you be highly capitolized as the price of land these days makes it difficult to make a decent ROI on rented farm land in the midwest.
I can confirm, that we pay ridiculous rental amounts for our Wind Turbines to the owners, often 2x higher, than farmers for harvesting the same land... I worked one year for a land fund, which rented the land to the farmers, so they could harvest their agri-products and then sell them and the yield was pretty stable and interesting (Europe).
First off Great post
I was wondering specifically how you went about financing and leveraging your existing properties.
Did you procure loans (mortgages?) from large banks or more regional banks? Did you run into many hurtles given your age and the amount of money you were playing with (I see your parents co-signed)? Did you run into any limits or caps as far as how many properties you could have leans on or how many loans per bank?
Thanks
Ill get to this tonight, I have a few other questions to answer as well I will cover them in a longer post when work winds down.
Well I was willed a property whose value was in the mid 7 figures. I refinanced this and used the proceeds to purchase other acreages.
Loans for farm grounds are usually made though a collection of small ag banks, because these loans are backed by the US Department of Ag the interest rates usually hover around or below 1% due to various subsidies.
I had to get my parents to co-sign the refinance and the first acrage I bought in Texas and Iowa. Due to the large value of assets I had it wasnt hard to get the loans just had to have someone of legal age to co-sign the loans.
No, I have not had any issues with a limit. It comes down to the same issues any other business will have. If you have a good stong history of profits and good management banks will bend over backwards to lend you money. If you have no history or have a company that always runs in the red it is harder to get the cash you need.
Is there any merit in buying land that sits on the marcellus shale deposit in New York while their is still a halt on drilling in hopes of steep appreciation once NYS says go for it?
Have people already done this? Is it just a bad idea?
In my experience no there really is not any merit in buying land on a known deposit, not from an appreciation point of view anyway. The only real upside you would see on this would be if the deposit turns out to be much larger then expected. The appreciation from the gas will be built into the asking price per acre. The only upside you could possibly get unforseen would be the drill site fees if the land has favorable access. That is too much of a gamble in my view. However I am no expert on the NY area gas fields, nor the current market for land. Just remember that land prospecting for mineral rights is a tough game, the land and mineral rights can be sepperated and sold off individually as can the individual mineral rights be seperated from one another.
I looked at a few of your other comments beforehand and you discuss taking the Series 7, getting a trading interview, buying suits on the cheap, all at the ripe age of 24. Nice apotheosis in 42 weeks.
Yep, I have money. I just choose not to disclose it. I have gotten my series 7, I have had an interview at a prop firm, had an interview for a bond sales position as well. Those who are truely weathly factor return into everything they do. I did a stint in IB and now I am a hf analyst at a distressed debt firm. I have had a colorful employment history up to now. I have several years of financial analyst experience working in my family business.
I think my personal holdings played a factor in me getting the positions I have gotten. My MD at the IB I worked at wanted me to consider doing a private placement, using the firms services of course.
Cool thread, something that I have zero knowledge on...Say that I bought two pieces of land. One that I expect to rent out to local farmers and the other that I hope to sell for a profit in a few years. What sort of costs would I most likely have to deal with in both cases? I would imagine that the farm land that I'm expecting to sell would be close to zero?
Do you have family/friends that keep an eye on your portfolio or do you regularly fly out to check up on them?
No real sense in waiting for the land to go up in value and not renting it out. The time horizon is much longer then a few years for this type of investment. You have the usual costs, taxes, loan servicing ect ect. You also have to check in from time to time to make sure that the farmers are doing their proper crop rotation, make sure they are following the proper set aside rules. If you are next to an organic farm you have all sorts of other headaches.
Some of my land is watched overy by family, other I do it personally.
great thread, there's so much to learn in reading this post but the two things that really stand out are FAMILY and your discipline and commitment to do something with what you got (ok a little luck with the mineral rights but hey).
Just found this gem. Struck oil- pun intended.
Thanks for the great write-up
@heister - ,are you still around?
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