The Oldest Investment

Over the years, I’ve talked about land as an investment. While I focus most of my time and energy on following stock and bond markets, you cannot ignore land as an investment option. It’s too big of an opportunity.

For perspective, the total value of all U.S. publicly traded companies is around $80 trillion. The total value of all U.S. publicly traded bonds is about $50 trillion.

The total value of U.S. land, meanwhile, is $85 trillion, including building structures.

Land is a huge investment category. And people love land as an investment.

This is nothing new. Land has been the favored investment for centuries. It’s often referred to as the oldest form of wealth, which would make it the oldest investment. It has been used by kings, emperors, and aristocrats as a store of value. Wars have been waged to control it.

Land is valuable.

And the reason it holds value is no secret. As people say, “They ain’t making any more of it.” This scarcity, combined with its productive value – particularly for agricultural land – is a powerful combination that has stood the test of time.

It wasn’t until recently, with ‘recently’ being used in the context of since when Earth was formed, that land was useful as a financial asset.

Bankers love it, too.

Why? For basic reasons, as explained by Mike Bird in a book called “The Land Trap.” Bird points out three irrefutable facts that make land a perfect source of collateral for debt. One, it does not depreciate or decay. Two, you can’t pick it up and carry it away. Three, it can’t be hidden.

Ask a banker to give you a sizeable loan with little down based on the value of cattle or jewels or a rare coin collection, and you’ll likely be turned down. Ask a banker to give you a sizable loan with little down based on the value of your stock portfolio, and you’ll get laughed out of the building.

If, however, you ask for a sizeable loan with little down and you have large land holdings, you very well may have a deal.

Fortunately, land can generate similar returns to my personal favorite investment, stocks. There are a lot of different ways to invest in land – residential real estate, commercial real estate, or agricultural real estate. Regardless, in analyzing historical performance of land, it is possible to achieve 8-10% annual returns, which is right in line with stocks’ historical performance.

Critically, though, to achieve similar long-term returns with land as can be achieved through stock ownership, you typically must employ leverage. In short, you have to buy land using debt to make the rate of return similar to stocks.

Fortunately, as discussed earlier, bankers are more willing to lend money at attractive rates for land than for other assets. So it’s not a difficult problem to surmount. Plus, land ownership often creates opportunities for tax benefits – interest deduction, tax-deferred exchanges, and potentially depreciation charges – which can be icing on the cake.

So while I love the power of stocks, I am also a believer in diversification, which is why I think owning land is a good idea.

That’s not a particularly hot investment tip – buy land! – considering Emperor Trajan of the Roman Empire took that very approach in 117 AD, at which point his land holdings amounted to two million square miles.

Some things never change, I suppose.