How much of everything you own can sit in something that pays nothing for ten years?

Question

19 acres at $84k. Taxes plus a once-a-year mowing contract run about $1,400. That part I can absorb without noticing. What I can't get comfortable with is that the purchase would be 31% of my investable money, and none of it comes back until somebody else decides growth reached the parcel.

There seem to be two positions in this room. The first is that raw land is a small sleeve, 5 to 10 percent, because you can't rebalance out of it in a week and a decade with no cash flow destroys your flexibility right when you might want it. The second is that a 5 percent position in an appreciation-only asset is close to pointless. The entire return is one number moving, so a thin slice of it won't change anything for you, and if you actually believe the growth thesis you should size the position like you believe it.

I can't tell which of those is discipline and which is a story. My salary covers the carry at either size, and I'm suspicious of that, because affordability of the carry keeps reading to me as permission to concentrate, which isn't the same thing.

What number do the people here who are actually holding land use, and is it a percentage of net worth or something else entirely?

mikeoconnell7 · Answer

The number I watch isn't net worth, it's how many months of the carry I could pay if the service business had a bad year. Land taxes don't care that invoices went slow. When I got to 24 months of carry sitting in cash separate from operating money, the acreage question got a lot calmer.

renee_dubois · Answer

Small multifamily here, so my answer is skewed, but every unit I've bought taught me the same lesson about reserves and land is the version of that with no tenant to help. I'd frame it as a share of monthly free cash flow rather than a share of net worth. If the carry is under 5% of what my units throw off after everything, I stop thinking about it. The 31% figure would bother me less if you told me what happens when the roof on your primary residence goes at year six.

karen_whitfield · Answer

Land is well past half of what I own and I don't think about it as a percentage at all, because nobody marks it to market and there's no statement arriving to talk me out of it. What I do track is years of carry funded in advance (I keep seven, which is arbitrary and works for me). The percentage frame assumes you'd want to rebalance. I never have.

kevin_lombard · Answer

@orchard when you say seven years funded, is that taxes only, or does it include the mowing and insurance side too?

How much of everything you own can sit in something that pays nothing for ten years?

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