Is developing raw land a good way to start REI in WA state?

Question

I am an older woman about to sell my single family residence. I want to use some of the proceeds to launch into real estate investing.

My initial idea was to buy parcels of raw land, deal with the county to get all the necessary permits to then install power, water, septic, access road etc. I would then either sell it to a builder at a mark up or build a house on it myself to sell for profit. I would then repeat the process until such time as I can purchase enough rental properties to generate a liveable income.

However, browsing through Bigger pockets has made me wonder if this is the best approach so I have signed up and am eager for advice as a beginner in real estate investing.

Ryland Taniguchi · Answer

Probably not the best place to start. We develop land here in Seattle and I don't think you can take a guru class to learn the basics of land development. Studying construction management at the University of Washington won't even give you all the skill set needed for land development (speaking from experience). Many of the experienced architects I know don't know how to develop land.

Before you develop land, you need to know your market inside and out. Find out what new construction sells for in an area, absorption rates, master the local zoning and the path of growth.

Land development I my opinion is more of a job than an investment. The best place to start in REI is buying 2% rule cash flow properties. It is hard to find 2% rule cash flow properties in the Greater Seattle area. I analyze between 50 and 100 deals a week locally here and almost never see 2% rule cash flow properties.

In the past, I have bought 2% rule turnkey properties out-of-state. Right now you can buy a turnkey property in Birmingham AL for $60,000 that gets $1100 to $1200/month rent fully rehabbed. That's what a 2% rule cash property looks like. Hard to find that deal in Greater Seattle.

But what you can do locally is find something better than the 1% rule. I bought a property today from a wholesaler for $79 k in tacoma. We'll buy through a combo of hard money and private money, and put $20 k rehab into the property. It will rent for $1100/month. That's not a 2% rule cash flow deal but it slightly above the minimum 1% rule requirement. But the beautiful thing about buying this rental locally is that I can do it with zero-money out of my pocket and zero of my own credit used (as we'll give 33% equity to a credit partner which makes it not a straw buyer transaction). Now I don't like this deal in itself, but it was a great deal for us because we got the next door parcel for free as part of the purchase.

We will build the next door parcel at $85 a sq ft and spend exactly $142,000 for soft costs (permits, architect fees, engineering) and building costs. We've done this exact same strategy now six times and so we can almost "copy and paste" the same prelim drawings and design finishes and know that it will sell in Tacoma for $229,000. The thing is that is not feasible to build this if we had to pay for the land. We have to get the land for free.

To summarize, I would buy out of state if you want to get the 2% rule and will use your own cash. Buy locally if you have private money investors that will work with you on your BRRR (Buy, Rehab, Rent, Refinance). What I have learned is that none of my local private money investor want to go to Alabama or Kansas City to JV on a rental. Also, if I go out of state turnkey, I add no value to them. They could just buy the rental themselves. Locally, I add value because it's hard even finding a 1%+ rule cash flow property in the Greater Seattle area, we use our construction company for the rehab, we recycle trim, doors, appliances from our higher price rehabs as materials for our lower price point rentals, we have solid long-term relationships with our hard money lenders, and we have our own real estate team to manage those parts. Locally, I can add tremendous value in buying a rental and thus can do it no-money out of my pocket and no-credit used.

The example I am speaking about also shows the dangers of buying raw land if you don't know what you are doing. In Tacoma, any price you pay for a single lot (that is not zoned to be subdivided) is too much if your an area where new houses go for less than $250 k. Many of the national builders bought when the raw land was 30% of what it costs to p-plat the land.

Brian Fouts · Answer

Investors that invest in raw land are going to tell you that it is a great way to invest.  Same as if you ask about wholesaling, flipping etc.

With regards to raw land and development, I would first ask you a question: what is your experience in new construction and development?

If you have experience in that arena, then it could be a great place to start.  If not... well, my opinion would be to start elsewhere, but that's only an opinion.  If you are driven and willing, you can be successful in pretty much any area of real estate.  Where there's a will, there's a way...

Orlando Roche · Answer

Very good advise

Martha Bishop · Answer

In response to Brian's question about my experience with new construction and development, it's zero ( if you don't count the wooden shed I built some years ago). It isn't my intention to build anything myself. I thought I could hire a builder contractor to do it. I think manufactured/modular home businesses include installation and set up in their services. My work would be dealing with the county officials in getting necessary permits, mitigation etc. Any physical work would be done by contractors.

Martha Bishop · Answer

Thanks Chris for the links to Snohomish County's pamphlet regarding Transfer of Development Rights. You are right about its obscurity and it is very generous of you to share the idea especially since developers seem to be very busy in Snohomish County so I can see where you are going with this.

The $270Ks price was true in midsummer but you are right about the land being the real value.

I did think about purchasing acreage with an old mfr on it that could be removed and replaced with a stick built house hoping that would take care of all the initial costs/permitting of installing power, well, etc. I have no illusions of anything being easy when dealing with County regulations and wasn't surprised to find you need to get a permit to remove an old mobile. I have seen a lot In Clyde Hill where the sellers demolished the house and then put the cleared lot on the market. Maybe there is money in buying land that has some old derelict structure on it and getting it clear and ready for a developer? Probably depends on location...

I have about two or three months before I need to decide which way to go and I really appreciate all the information on BP and helpful members.

I

James Wise · Answer

I do not know to much about development but it does not seem like a beginners game IMO.

Chris Newman · Answer

Hi @Martha Bishop

Welcome to Bigger Pockets!

My best advice for newcomers is to go slow. All the normal BP investing niches in Puget Sound are jammed with profit-killing competition. And, it's not nearly as easy as they make it look on TV. As for developing raw land, you'll be going up against the SnoKing Master Builders Association members and they don't leave much on the table for others.

2nd best advice: Before you put out a dime on a deal, run it past the cynics here. There's a dedicated forum just for deal analysis and feedback. If there are snakes in your deal, they'll find them.

As for small acreage parcels with 30 year old mobiles, $270k seems awfully high to me, unless the land itself is exceptional. I've seen a fair number of mobiles on an acre or so, fairly close in, for $100k less. Check out the area near SE 20th St. between Hwy 9 and Machias road, due east of downtown Everett. There were a lot of these done here in the 80's and they're wearing out.

If you plan to redevelop the lot, which isn't necessarily a bad idea if you really know what you're doing, don't forget the cost of disposing of the old mobile. If you can't find someone to take it as a freebie, this could get costly. Solid waste disposal costs $100/ton or more, plus a crew to tear down the coach and dumpster rental, plus hauling.

My particular niche to raise capital to buy passive managed multifamily buildings for cashflow is the "non-developing" of rural land, which is a lot faster and easier than the other way around. That is, unbundling the unused residential development rights from cheap rural land and transferring them, in the form of county-certified credits, to more valuable urban growth areas in the western county. If you've never heard of this, don't feel bad. Almost nobody else has, either. It's new and it only works within Snohomish county.

The residual land has a permanent conservation easement placed on its title that prevents it ever being developed for residential. But, it can still be used for all other permitted uses. One interesting option is that an occupied RV is still legal for 180 days/year, one per lot. That opens the doors to reselling to Snowbirds or Preppers, but probably not both in the same community. But, there are a lot of other interesting options, too. I particularly like the idea of selling "$500 post holes" at the rate of thousands per acre.

In rare cases, the development rights credits are worth considerably more than the asking price for the land that they came with - that's my particular target, while they last. This sounds like it's a little more up your alley, too. Certainly, there's pretty much no other competition.

Here's the county flyer with the rules on how this new Transfer of Development Rights program works: http://snohomishcountywa.gov/DocumentCenter/Home/View/8118

My best estimate is that a TDR urban Receiving credit is a good value for a developer to buy at $22,000 and every acre of multifamily development site will need 36 credits. We should know prices for sure starting within a couple of months. This is still the ground floor for a brand new free market.

Here's a 40 acre TDR investment property that I currently have under contract near Arlington: https://www.redfin.com/WA/Arlington/xxxx-Grandview-Rd-98223/home/57084686 (The outlined-in-red lot is the wrong one, on the wrong street. The correct lot is about a mile west on Grandview Road and has a big powerline easement running through it that shows on the satellite view. But, what matters is the size and zoning.)

As an exercise, assuming that the residual land has no value (although it does), what's the profit here, just from pushing paperwork around?

Please PM me if you have questions about anything.

Chris

Jay Hinrichs · Answer

@Ryland Taniguchi  like any of the mid west deep south cities you can also buy C's at 40 to 55 that get rent at 600 to 750... tougher on the management side of course

Jay Hinrichs · Answer

@Ryland Taniguchi I think 2% in a major metro west coast area is only done when someone gets something handed down or that one in a life time wholesale deal were the seller just had no clue and the buyer no conscience .  LOL...

I like B ham a lot for turn key... my guys do a great job there for their clients. its a little under the radar and I like the topograhphy of the area so you get some character in the area's and the homes.. lots of bonus sq ft on the day light ranch type homes.

yes market is more 65 yo 75 for 750 to 850 rents... 1100 plus rents are going to be more in the 90 to 110 PP range. From the deals I see ...

Ryland Taniguchi · Answer

You might be right because the rent prices have been going up. Seems like every time I fly down there the house purchase prices were higher than before. Maybe more like $950 to $1050 for the rents for that rent range. On second thought, $1100 to $1200 sounds quite high for the $60,000. That maybe more like the $75,000 houses in Midfield and nicer area of Centerpoint. The rents are more than $850 for sure... Area specifically is the area south of Centerpoint and Center point in Birmingham. I stay out of the airport area, Enslee, Fairfield and Bessemer.

My main point was that you its hard to find a 2% cash flow property in Greater Seattle.

Is developing raw land a good way to start REI in WA state?

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