Where the annual tax carry comes from when land is the only asset held
Land banking produces no income, so the property tax bill has to come from somewhere else every year for the length of the hold, and there are a few common approaches to funding that carry, each with real tradeoffs. One approach is paying the tax bill out of ordinary income like any other bill. Raw land taxes are usually modest, often a few hundred to a couple thousand dollars a year, and the reasoning behind this approach is that an investor who cannot cover that from income probably should not be tying up capital in an asset with no cash flow at all. A second approach is funding the carry at closing, buying a smaller parcel and setting the difference aside in a separate account earmarked to cover taxes and insurance for a set number of years, so the hold can survive a period of reduced income. The tradeoff is reduced buying power up front, since less capital goes into the land itself. A third approach pairs the land position with something that produces income, a rental or a note, and lets that cash flow cover the land's carry, so the two positions are managed together rather than the land standing alone against a fixed income stream. A fourth pattern involves buying more acreage than intended to hold long term, with a plan to sell off a portion if the carry becomes burdensome. That approach works until the sale is forced in a weak market, which is exactly when a partial sale is least attractive. For an investor without existing rental income and with uneven cash flow, the second and third approaches tend to be more resilient than relying on ordinary income alone, since both build in a buffer that does not depend on income staying steady through the entire hold.
How should the carry on a land bank be funded?
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