1031 Exchange
A 1031 Exchange is a great tool to maximize the purchasing power of your investments.
I won’t bore you with the basics of the 1031 rules, but rather demonstrate why vacant lots can be a great replacement property in your investment portfolio. Even better, vacant lots are often the easiest way to enter the real estate investment market because of their low cost.
Using vacant lots as the relinquished property.
Small pieces of land, less than 2 acres, are usually purchased from anywhere between $10,000 and $200,000. More specifically, investment parcels are found at the lower end of this range because of their potential to produce larger percentage returns.
When a $20,000 lot appreciates by $5,000, your return is 25%, whereas a $100,000 lot that appreciates by $5,000 only produces a return of 5%.
Another advantage is diversification. To expand upon the example above, you could purchase 5 lots at $20,000 or 1 premium lot at $100,000. The less expensive lots allow you to spread the risk over the 5 parcels rather than burden one property with all of it. This can be a very important characteristic of your portfolio given the potential factors that can influence value. Acts of nature such as flood and fire or acts of man such as pollution or rezoning can all have significant impact on value. This is an example of how diversification can be such a powerful form of asset protection.
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