Buying In The Path Of Growth

Buying in the path of growth, you can make a large profit in a year or less. But get the timing wrong, and you might have to sit on a property for years without sufficient income to cover your holding costs.

There are reasons why towns have to grow in certain directions. Sometimes it is a matter of geography. It is difficult to put new buildings on the sides of steep valley walls, or out into a lake or ocean. Sometimes it is a matter of available land. If a town is surrounded on three sides by national forest which cannot be developed, it is easy to see which way the town will grow.

When a town does start to grow, the property values in the path of that growth can rise very quickly. This is especially true if there are few ways for the growth to go, as in the example with the national forest. Those who own land in the path of the growth will sometimes see the value of their property double in just a few years.

The goal with this kind of investing, then, is three-part:

1. Determine if the area is going to grow. Are there new jobs coming? Is the population already consistently growing? Are there reasons why more people and businesses will be attracted to the area soon?

2. Determine the direction of growth. Where is the town already expanding, and why? What are the reasons why property is more attractive in one direction versus the others?

3. Buy property in the path of growth, wait for an increase in value, and sell.

When I lived in Traverse City, Michigan, I watched as some properties went up by more than 25% per year to the south of town (that means doubling in value in about three years), while the general rate of appreciation was less than 10%. With water on the North side, and subdivisions on the West, the growth was bound to go South or East.

How To Buy In The Path Of Growth

Land is often what is most in demand in the path of growth, as new businesses come to the area. Many towns only have one or two major highways, for example, and new businesses want that exposure. Commercial lots may double in value along such a highway while one street over the values rise only a little.

The problem with buying for appreciation, however, is twofold. First, you are always guessing to some extent, as to when the values will really take off. You might guess that our new lot will triple in value, and then it does - right after you gave up and sold it in the fourth year to get your money back. The second problem is part of the first - you have holding costs while waiting for your prediction to come true.

The bets way to overcome this may be to stay away from pure land plays. Land may not provide any income while you wait, and meanwhile you have to pay property taxes and interest if you borrowed money to buy it. What is an alternative?

Existing buildings that have income is one way to avoid this problem. Of course, you may get less appreciation on such properties, because part of the value is in the building, and it is the land that is going to increase most in value. But if done right, they pay for themselves while you wait.

The best examples I remember from Traverse City were properties that had been zoned commercial along the highway, but had old mobile homes on them. The mobiles had virtually no value, and would be hauled away for scrap metal as soon as the ultimate commercial user bought the land. In the meantime they provided income.

One piece of land was for sale for $89,000, and just down the highway a bit from new buildings and businesses going up. It had three mobile homes on it, which likely rented for $500 per month each. You could even get positive cash flow out of the property, and it is probably worth $200,000 now.

Buying in the path of growth is potentially very profitable. Buying properties that pay for themselves makes it a relatively risk-free strategy.