How much of a portfolio can sit in something that pays nothing for ten years

Question

Take 19 acres at $84k. Taxes plus a once-a-year mowing contract run about $1,400, which most buyers looking at that parcel can absorb without noticing. The uncomfortable part is when the purchase is 31% of 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 cannot 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, since the entire return is one number moving, so a thin slice of it will not change anything, and anyone who genuinely believes the growth thesis should size the position like they believe it. It is hard to tell which of those is discipline and which is a story. A salary that covers the carry at either size deserves suspicion, because affordability of the carry keeps getting read as permission to concentrate, and those are two different things. 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

A more useful number than net worth is how many months of carry an owner could cover if the business behind it had a bad year. Land taxes do not care that invoices went slow. Once an operator has something like 24 months of carry sitting in cash, separate from operating money, the acreage question tends to get a lot calmer.

renee_dubois · Answer

Small multifamily is the useful comparison here, because every unit teaches the same lesson about reserves, and land is the version of that with no tenant to help. 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 the units throw off after everything, it stops being worth thinking about. The 31% figure would matter less if you laid out 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

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

How much of a portfolio can sit in something that pays nothing for ten years

4 replies