Most investors find real estate and add a few rental properties to their portfolios for diversification. Unfortunately, they stop there. 

Other investors will learn more and find that investing in duplexes, or fourplexes with an experienced turnkey rentals provider and property management team can make real estate investing a whole lot easier – and often more lucrative.

Then there is the super-savvy investor who begins to see large parcels of land being developed into those duplexes and fourplexes and begins to wonder how they can get in on that stage of real estate investing.

This is where the land development fund comes in.

What is a Land Development Fund?

A land development fund is a type of real estate investment that allows investors to pool their money together to purchase land that is intended to be developed into lots for the construction of turnkey rentals. 

Typically, an operator will deploy investor capital in the purchase of raw land and then work with local governments, engineering firms, and construction companies to place utilities, divide parcels into lots, and even construct homes that will be sold. 

By investing in a land development fund, investors can deploy their capital without having to source the deal or figure out how to develop the land themselves. Instead, the fund’s experienced management and operations team will handle these tasks, allowing investors to enjoy the potential returns that this asset type can provide.

Just as with any real estate investment, it is essential that investors perform their own due diligence on the operations team and the track record they have in completing the type of deal. Land development is no exception. An operator team needs to understand the local permitting laws, the engineering requirements, and many other specific elements to development. 

Why Invest In Land Development vs. the Rental Homes?

The primary advantage of investing in a land development fund is the ability to passively invest in real estate without having to worry about the day-to-day management of the process. The management team will take care of all the details, from sourcing the land and developing it into lots to managing the construction process and ultimately selling the completed properties. This makes it an ideal investment for those who want to invest in real estate but don’t have the time or expertise to manage a property themselves.

Another advantage of investing in a land development fund is the potential for high returns. Land development can be a lucrative investment, particularly when the properties are developed into turnkey rentals that generate rental income. 

However, it’s worth noting that the higher returns of land development are also associated with higher risk, as there are many factors that can impact the success of a development project. Therefore, it’s important to do your due diligence before investing in a land development fund and ensure that the management team has a strong track record of success.

Investing in a land development fund is also a way to diversify your investment portfolio. Real estate is often considered a hedge against inflation, and it can provide a stable source of income over the long term. By investing in a land development fund, you can add real estate to your investment portfolio without having to worry about managing the property yourself. 

Deploying capital into a land development fund is also a diversification tool within the broader world of real estate investing. Many real estate investors have capital in physical assets, like duplexes and fourplexes, and receive rental income. They leverage land development as a diversification play and a more passive form of building wealth. This can help you spread your risk across different asset classes and potentially increase your overall returns.

Example Land Development Fund Projected Returns and Details

A land development fund typically has a 24 – 36 month hold period for investor capital, which is on the shorter side of many asset-based real estate funds, which often hold capital for 5 – 7 years. 

In this amount of time, the fund deploys capital to take raw land and develop it, often including the construction of duplexes and fourplexes to sell. The fund typically concludes once the homes are ready to be sold. Many investors, having been a part of the entire development and construction process of these turnkey rentals, decide to purchase the newly built homes with their exit capital to continue leveraging their money through real estate. 

Projected returns for land development can be as high as 25% average annual return. We’ve even returned more historically. These deals can be exceptional opportunities for investors to accelerate their capital growth for this reason.

Stages of A Land Development Fund

Here’s an expanded overview of the stages involved when a land development fund is initiated:

Stage #1: Finding Land

The first stage of a land development fund is to identify and acquire suitable land for development. The fund’s management team will typically use its expertise and network to identify properties that meet its investment criteria, such as location, zoning, and development potential.

Stage #2: Entitlements and Engineering

Once the land is acquired, the management team will begin the process of obtaining the necessary entitlements and permits from the local government to develop the property. Ideally, they’ve already worked with local representatives during the acquisition process to confirm the suitability of the land for development.

This process can include zoning changes, environmental permits, and other approvals. The management team will also work with engineers to design the site plan and infrastructure.

Stage #3: Horizontal Infrastructure

Once all the necessary approvals are obtained, the management team will oversee the construction of the horizontal infrastructure, which includes water, sewer, and street improvements. 

This stage is critical as it sets the foundation for the entire development.

Stage #4: Building Construction

Once the horizontal infrastructure is complete, the management team will begin construction of the buildings. Depending on the investment strategy, the buildings may be single-family homes, duplexes, fourplexes, or another type of rental property. 

The management team will oversee the construction process, ensuring that it is completed on time and on budget.

Stage #5: Property Sales

Once the buildings are complete, the management team will begin marketing and selling the properties to potential real estate investing buyers. This can include individual investors, owner-occupants, or institutional buyers. The management team will work to maximize the sale price while ensuring a timely and efficient sales process.

It is common for investors in the development fund to also wish to purchase the final assets since they had a hand in the process of their construction. This can be a great way to purchase real estate rental properties since nearly all of the due diligence has been completed. 

Stage #6: Investor Returns: 

Once the development is fully sold, the passive investors in the land development fund will receive their returns. The exact returns will depend on the terms of the investment, such as the preferred return rate, profit-sharing structure, and other factors.

Stage #7: Property Ownership

If an investor would prefer to own the buildings outright, they may have the option to purchase them using their returns from the land development fund. This can provide an opportunity for investors to hold onto the properties for long-term rental income or sell them for a profit.

Benefits of Investing In A Land Development Fund

Real estate investors leverage land development within their portfolio for several reasons. Benefits to investing in this phase of real estate development include:

1. Potential for high returns: Investing in land can be a lucrative investment strategy, with the potential for high returns if the land or properties are sold at a good price.
2. Control over the development process: By purchasing the land with an experienced land development team, you have more control over the development process and can ensure that the properties built on it meet your standards.
3. Diversification of your investment portfolio: Investing in land can help to diversify your investment portfolio and reduce your overall risk.
4. Tangible asset: Land is a tangible asset that you can see and touch, which can provide a sense of security and stability in your investment portfolio.

Conclusion

In conclusion, a land development fund is an attractive option for investors looking to passively invest in real estate. It offers the potential for high returns, diversification, and the ability to deploy your capital without having to worry about the day-to-day management of the property. 

However, as with any investment, it’s important to do your due diligence and ensure that the management team has a strong track record of success before investing in a land development fund.

Next Steps

Here at Invest 5S, we provide multiple ways to leverage the power of real estate in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits. 

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