Creating freedom through Real Estate Investing

*Each month, Mason & I send an email newsletter. Below is my excerpt from our most recent edition. 

Having done business in over a dozen states, failed developments that are secondary or tertiary to primary markets consistently show up as my favorite places to do business.

Let me explain with an example. 

Pueblo West

In 2018, when I first started to learn about land & development, a friend showed me lots he owned in Pueblo West, CO. He referred to them as “shovel-ready” and pointed to the water meter, electric line and sewer hookup emphasizing their importance and how it took only a matter of weeks to obtain a permit to build a home. He showed me the plat map of the subdivision and kept saying that it was a “master planned community” with “all utilities in place”. 

At the time, I didn’t quite grasp the significance of this.

6+ years and hundreds of deals later, I certainly do. 

In the years that followed the aforementioned conversation, I began to participate on the new builds with him and meet more people in the development space which caused the significance of “shovel-ready” to become very clear. I’d talk to people building projects in Colorado Springs who would tell me they were a year (or more) and $10s (sometimes $100+) of thousands of dollars of soft costs into their projects BEFORE getting a permit. Quite the contrast to building on infill parcels in Pueblo West where it took 3-4 weeks and a few thousand dollars and to get plans and a permit to build. Sure, the projects people were doing in CO Springs were larger BUT there was endless land available in PW. I watched a friend of mine build/sell 16 units (his last development project ever) and it took years, huge amounts of capital and massive headache whereas buying/building on 8 duplex lots in Pueblo West was very easy. It reminds me of a scene from one of my favorite movies, There Will be Blood, where Daniel Day-Lewis is buying land and while looking at the plat map asks “Can they ALL be had?”.

The reason for the ease of building (and the point of the whole conversation) is that somebody had already done the years of work and spent millions of dollars to create the community (see picture at the bottom). All entitlement work was done, utilities were to each lot AND you could buy a parcel on market for $6K – $8K!!! Newly-built 3/2/2 ranches were selling around $250k at the time and you could buy shovel-ready lots for eight thousand dollars! Anyone with any experience in the development world knows this is absurdly cheap as it’s very typical to spend 10% – 15% of the finished build cost on the land. Land was virtually free and building spec homes (or my personal favorite, presales) was very profitable.

Shovel-Ready AND in Demand

Let’s bookmark that point for a moment and rewind to the 60s and 70s. The army corps of engineers was putting dams at different points along the Colorado & Arkansas Rivers. There was a developer following their work, buying up the land around the newly-formed lakes and creating subdivisions. He did Lake Havasu in AZ and shortly after; Pueblo West. Without going into too much unnecessary detail, he went broke after doing Pueblo West and the finished subdivision sat mostly dormant for many years. A few lots had been built out and people lived there but the vast majority of it remained empty. 

There were a number of things that went wrong with the developer personally, but he was also too early! Colorado was not the thriving state that it has been the last decade and a half so regardless of his personal financial situation, I doubt it would’ve been built out successfully at the time. 

Bringing the conversation back to the price of Pueblo West land in 2018, this was only significant because Colorado was growing and the cities up north were exploding in population and price. It’s the contrast of housing/development costs just an hour north compared to PW that created such an opportunity. There are many failed subdivisions that are worth next to nothing because the nearest cities are not growing nor desirable. 

Given this, I look for opportunities in failed subdivisions on the outskirts of booming metros. Just follow the major highways out from big cities and see what small towns you find within an hour or two that nobody has heard of (or that have negative connotations). Pueblo West CO, Pahrump NV, Lehigh Acres FL, Marion Oaks FL, Brunswick County NC, Colorado City CO are just a few places that fit the description where I’ve consistently made money.

In addition to the above, there are several important points/concepts I want to drive home that describe the markets all of these failed subdivisions were in.  

Negative Connotations – Who Cares What You Think? 

When I came to CO, I quickly found that the word “Pueblo” immediately caused Coloradans to cringe. The city of Pueblo was once a thriving industrial town based around the steel mill. Much like many of the Great Lakes Cities back east near where I grew up, it’s gone downhill in the last few decades and is known for crime, violence and rundown neighborhoods. 

Pueblo West is not part of the city of Pueblo and lies a few miles west at the base of the reservoir. Yet, simply attaching the word “Pueblo” to anything causes most Coloradans to avoid it.  

Moving here from OH I didn’t have any preconceived notions about the city so it didn’t bother me (I’ll also note, what is known as a “bad” part of town here is usually laughable compared to back east). 

This takes me to the subdivisions/cities I mentioned above. Just about every one of them had some sort of negative connotation and was ignored, had finished lots just sitting there AND was near a rapidly growing metro. Pahrump was known for its brothels and trailers, Brunswick County was one of the poorest counties in the country with rundown trailers everywhere, Lehigh Acres was a hick town where you went to buy drugs, etc……

I’ll use Brunswick County as a visual example (see attached picture below). It’s sandwiched between Wilmington and Myrtle Beach on the Atlantic Ocean with beautiful beaches and excellent weather. Wilmington is already a nice, established city and Myrtle Beach is a prime vacation spot for northeasterners (both are expensive). Additionally, both N and S Carolina are growing rapidly which further pushes up price in Wilmington and Myrtle Beach. 

This leaves Brunswick County between them with numerous finished subdivisions just a few minutes from the beach. All the while, you can buy entry-level new construction in the low $200s.

Get the picture? There’s a point at which the price of the surrounding cities, combined with rapidly growing population and availability of cheap, shovel-ready lots trumps any sort of reputation the area might have and it starts to grow. 

Quality VS Price

This takes me to the quality vs price spectrum. All too often, high-quality assets get bid up as if they’re infinitely valuable (the nifty fifty, tech stocks prior to the early 2000s bubble, etc) while less-desirable assets are ignored and trade at a bargain all day long.

See the example above of Pueblo West for the first few years I lived in CO. It was a bit quieter town (yet, there was still demand) and I could buy shovel-ready lots at $8k on the market. That’s absurdly cheap. While prime dirt up north was getting bid up to high prices, I could buy a less prime (but still useful) parcel for practically nothing and profit off of it easily. 

I’ve continually found similar opportunities in ignored markets where it’s not the most exciting of places but the price is SO LOW that there’s opportunity. While everyone’s chasing the shiny, “next-best-thing”, I’m in my own world in an OK market with little-to-no competition. 

I always keep this concept top of mind when looking for new opportunities. 

Incompetence

The final corollary to the ideas above that I want to hit on is one of my favorite qualitative measures (when looking at markets). What’s the competency level of business people (realtors, builders, investors, etc) and where can I find a lack of competency paired with high consumer demand? 

I remember first looking at Brunswick County, NC several years ago and having a conversation with a few of the local realtors. I referenced a lot I was looking at buying (not listed) and two realtors in a row were confused by the idea of buying “off-market”. One told me “Oh, you can’t buy that, it’s not for sale!” (this still makes me laugh, years later). 

When I find markets like this where nobody knows anything about investing, direct-to-seller marketing or real estate in general (yet, there’s consumer demand) this screams opportunity! All of the aforementioned markets where I’ve made money over the years fit this. 

Closing Thoughts

To summarize as succinctly as I know how, it comes down to understanding the difference between “raw” and “horizontally developed/shovel-ready” land and looking for the latter of the two where other investors are not, in spite of their being significant consumer demand. This strategy has served me well these last 6 years and continues to do so. I’ll follow up on this in another 6 years and see if that’s still the case.