Author Topic: Great opportunity or great mistake?  (Read 4259 times)

2Cent

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Great opportunity or great mistake?
« on: December 02, 2015, 05:51:48 AM »
I have an opportunity to buy a plot of land for about 100k in a locaton that is about to be developed. It would likely double in value in a few years once the area is built up so it seems like a great opportunity.

The problem is that for me 100k is not an amount I can afford to lose. The risk of a total loss seems unlikely, but it's always there.(city decides to build a garbage dump next door or something). So while it may make me rich, it's a bit all or nothing and could land me in debt for many years to come.

I passed up on similar offers in the past, and see those plots going for 4-10 times their value for which I am now kicking myself for not being more bold and investing in a safe single digit return investment instead.

nobodyspecial

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Re: Great opportunity or great mistake?
« Reply #1 on: December 02, 2015, 06:21:16 AM »
Can you afford it to not make you any money?

If you buy it and the development is stalled for years can you pay the interest/taxes comfortably or will you be forced to sell at a loss if there is any delay?
 

Retire-Canada

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Re: Great opportunity or great mistake?
« Reply #2 on: December 02, 2015, 06:35:00 AM »
The problem is that for me 100k is not an amount I can afford to lose.

Until you can afford to lose the $100K you are not wealthy enough to be a real estate speculator.

zephyr911

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Re: Great opportunity or great mistake?
« Reply #3 on: December 02, 2015, 06:54:43 AM »
I have an opportunity to buy a plot of land for about 100k in a locaton that is about to be developed. It would likely double in value in a few years once the area is built up so it seems like a great opportunity.

The problem is that for me 100k is not an amount I can afford to lose. The risk of a total loss seems unlikely, but it's always there.(city decides to build a garbage dump next door or something). So while it may make me rich, it's a bit all or nothing and could land me in debt for many years to come.

I passed up on similar offers in the past, and see those plots going for 4-10 times their value for which I am now kicking myself for not being more bold and investing in a safe single digit return investment instead.
My stance would depend on your NW, current income, and priorities.

What you're describing could earn you a ton of money, but it's a purely speculative play and the risks - lack of liquidity, no guaranteed return, multi-year holding likely required - would suggest upper limits based on those factors.

My town is full of opportunities like this, and is currently a fast-growing city where appreciation is likely and loss is unlikely... but I'd never put all my eggs in one basket. My biggest chunk of real estate equity is less than 10% of my NW, and it's an income property with positive cash flow. Later on when I have more investments and more passive income, I might consider such a play, and even a more aggressive allocation (15-20%) if I'd done my due diligence on the likely gain and the potential risks. But also, I'd only do this if I were still earning high income and willing to offset any potential loss by working longer. Currently I'm very happy in my job but I re-evaluate periodically to avoid committing myself for longer than this state of affairs may last. And for you, that might be a consideration too. Think about what might happen during that holding period to force you to cash out, even at a loss. Selling land in a hurry usually means offering a large discount. If there's a chance you'll have to do that - mark this down as a research opportunity, leave it alone, but watch it and learn from the future.

False urgency in real estate has bankrupted many, many people. Opportunities will always abound.

arebelspy

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Re: Great opportunity or great mistake?
« Reply #4 on: December 02, 2015, 07:42:50 AM »
I personally would pass. There's no underlying fundamentals, just
 complete speculation. Not for me.
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Gone Fishing

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Re: Great opportunity or great mistake?
« Reply #5 on: December 02, 2015, 09:12:56 AM »
I'd want a net worth of $2 million before messing with a $100k spec deal.     

DividendMoney

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Re: Great opportunity or great mistake?
« Reply #6 on: December 02, 2015, 09:38:50 AM »
If you believe in the deal, find partners to bring your exposure down to a level you are comfortable with.

10% of something is better than 100% of nothing :)

2Cent

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Re: Great opportunity or great mistake?
« Reply #7 on: December 16, 2015, 04:24:44 AM »
If you believe in the deal, find partners to bring your exposure down to a level you are comfortable with.

10% of something is better than 100% of nothing :)
Thanks for the idea. I think I will do this. 50k is also a lot to risk, but I can manage to pay it back in a reasonable amount of time should the opportunity fail completely, so I would never be forced to sell.   

arebelspy

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Re: Great opportunity or great mistake?
« Reply #8 on: December 16, 2015, 06:06:14 AM »
If you believe in the deal, find partners to bring your exposure down to a level you are comfortable with.

10% of something is better than 100% of nothing :)
Thanks for the idea. I think I will do this. 50k is also a lot to risk, but I can manage to pay it back in a reasonable amount of time should the opportunity fail completely, so I would never be forced to sell.

I'd personally be uncomfortable investing other people's money on a deal I wasn't willing to do myself.  Seems like a big risk to the relationship.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

2Cent

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Re: Great opportunity or great mistake?
« Reply #9 on: December 16, 2015, 06:22:00 AM »
If you believe in the deal, find partners to bring your exposure down to a level you are comfortable with.

10% of something is better than 100% of nothing :)
Thanks for the idea. I think I will do this. 50k is also a lot to risk, but I can manage to pay it back in a reasonable amount of time should the opportunity fail completely, so I would never be forced to sell.

I'd personally be uncomfortable investing other people's money on a deal I wasn't willing to do myself.  Seems like a big risk to the relationship.
I'm also investing myself, so I am willing to do it. Just not for that amount. We will just split the cost and the profit. As I am quite sure there will be a profit, and it is very unlikely to be a total loss it should not be a problem.

WerKater

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Re: Great opportunity or great mistake?
« Reply #10 on: December 16, 2015, 07:15:07 AM »
I have an opportunity to buy a plot of land for about 100k in a locaton that is about to be developed. It would likely double in value in a few years once the area is built up so it seems like a great opportunity.
And how likely is that really? Quantify it! If you think it is really high (90% or so): Why would anyone sell the land to you for 100k? Why would he not just wait for a few years and then sell for 200k?
It is likely that there is much more risk here than you think. How many such offers were there in the last years that did not play out but that you don't remember because they are not so noteworthy?

2Cent

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Re: Great opportunity or great mistake?
« Reply #11 on: December 16, 2015, 09:19:19 AM »
They are selling it because it is already a lot of money for them. They got it for maybe 10% before the plans where announced and have a lot more land there. So they want some money now.

arebelspy

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Re: Great opportunity or great mistake?
« Reply #12 on: December 17, 2015, 12:40:21 AM »
We don't have enough information to conclude "don't do it," but it's definitely something that should be approached with LOTS of caution, and 10x more so if you're going to bring in partners.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Indexer

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Re: Great opportunity or great mistake?
« Reply #13 on: December 17, 2015, 07:54:36 PM »
I have an opportunity to buy a plot of land for about 100k in a locaton that is about to be developed. It would likely double in value in a few years once the area is built up so it seems like a great opportunity.

The problem is that for me 100k is not an amount I can afford to lose. The risk of a total loss seems unlikely, but it's always there.(city decides to build a garbage dump next door or something). So while it may make me rich, it's a bit all or nothing and could land me in debt for many years to come.

I passed up on similar offers in the past, and see those plots going for 4-10 times their value for which I am now kicking myself for not being more bold and investing in a safe single digit return investment instead.

Some things to consider...

1. If you can't afford a total loss you probably shouldn't invest in anything more aggressive than a stock index fund like VTSAX. It will be volatile, but unless the US is destroyed it shouldn't be going to zero. If you can't afford a total loss then you can't afford the millions of possibilities that could ruin future property development.
2. In a few years?  What if in reality it doesn't? In 2006 people were sure all sorts of places were going to get developed in a few years... they still aren't developed today. 2007-2009 saw to that. What makes this property immune from the economy?
3. The fact that you passed on other properties and now they are worth 4-10 times as much is not a reason to kick yourself, and if anything it can cloud your judgement. In 1999 a lot of people were kicking themselves for not getting into tech stocks years sooner. And many of those people chose 1999 as the year to start investing in tech stocks.

The best advice I can give....  If you passed on deals in the past hold this deal to the same level of scrutiny that you did those deals. If the fundamentals of the deal hold up even when considering the above then it is worth looking at, but the very last thing you should do is invest because you missed out on another property that shot up 4 times.

Mighty-Dollar

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Re: Great opportunity or great mistake?
« Reply #14 on: December 18, 2015, 02:41:36 AM »
I have an opportunity to buy a plot of land for about 100k in a locaton that is about to be developed. It would likely double in value in a few years once the area is built up so it seems like a great opportunity.

The problem is that for me 100k is not an amount I can afford to lose. The risk of a total loss seems unlikely, but it's always there.(city decides to build a garbage dump next door or something). So while it may make me rich, it's a bit all or nothing and could land me in debt for many years to come.

I passed up on similar offers in the past, and see those plots going for 4-10 times their value for which I am now kicking myself for not being more bold and investing in a safe single digit return investment instead.
This is the most basic rule of investing. Don't put all of your eggs in one basket. Alen Iverson invested all of his money in Detroit real estate and look where that got him after the 2006 housing crash.