Cash only on raw land, or is financing a hold ever sane?

Question

I've got money sitting from the service business and I'm looking at a 9 acre piece an hour out. Two people I trust told me two different things in the same week.

The first said land banking with debt on it is how people get wrecked. There's no income, so the payment comes out of your pocket every month whether or not anything is happening on the ground, and if your business has a slow year you're forced to sell dirt in the worst possible market. Cash means the only thing that can hurt you is the tax bill, and you can carry a tax bill through almost anything.

The second said cash on raw land is a waste of good money. If a seller will carry paper at a reasonable rate, you tie up a fraction of the cash, keep the rest working in the business, and the payments are just carry that you already accepted when you bought an income-less asset. Terms on any land loan or seller note vary a lot and you'd need to get whatever you're quoted in writing, but his point was that the cash you didn't spend is worth something too.

I can see both. Paying cash for 9 acres would be most of my reserve and my crew payroll doesn't care about my land thesis. Financing it means a fixed monthly bill against a parcel that might do nothing for a decade.

Curious where the room lands, especially anyone who has actually carried a note on ground that produced nothing.

luis_carrera · Answer

I've been sitting in spreadsheets on this exact question for months instead of buying anything, so take that for what it's worth. The thing that moved me was modeling a bad year. Cash purchase, bad year, you owe $1,400 in taxes and you get through it. Financed purchase, bad year, you owe the note twelve times and the lender doesn't care that the sewer study got delayed. The parcel didn't change in either case, your ability to hold did.

Where I think your second friend is right is on size. Nine acres at cash price might be most of your reserve, and being cash-poor is its own risk even with no debt. I'd rather own 4 acres free and clear than 9 with a payment and nothing left in the account, and I'd want to know what the seller's note actually looks like before ruling it out, particularly what happens if you want to sell a piece of it before the note is paid. Get whatever you're offered in writing and have someone qualified read it.

Cash only on raw land, or is financing a hold ever sane?

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