Own Your Piece of Paradise

Enjoy your rural getaway and at the same time diversify your investments.

Four-year-old Jonathan Killmer dips his toes into a creek and watches, enthralled, while his dad unloads sacks of deer feed from a pickup. As he works, Bill Killmer explains to a visitor why he bought hundreds of acres of rolling pine and hardwood forest in northeastern Georgia. Killmer, 50, grew up in Ohio, the descendant of farmers. He says he's "sort of retired" after selling a travel business and a building-maintenance company in Atlanta. He doesn't intend to plant corn or soybeans on his spread, which he calls Rosser Creek Farm -- the upcountry red clay wouldn't be suitable. His agenda: Hold the land as an investment for at least five years and "have a lot of fun while we own it." Then he may sell the farm in pieces, subdivide some land at the edges for estate-home sites -- or perhaps do nothing at all.

Killmer has counterparts all across the country, mostly in Texas, the South and the western mountain states. Investors are paying anywhere from $1,000 to $20,000 an acre for land that doubles as a private recreational escape and a diversifier for a long-term portfolio. Killmer hunts some, but as the parent of Jonathan and three teenagers, he sees the farm as a family retreat -- a place to spend lazy days angling for bass, catfish and brim in the property's ponds, as well as camping, hiking, swimming, spotting turkeys and other wildlife, and just hanging out.

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About 75 miles east of Atlanta's beltway, Killmer's acreage isn't exactly in the wilderness. But it wasn't easy to acquire because it wasn't on any multiple listing service. Kevin Teston, a land broker in Augusta, Ga., worked with Killmer for a year to find the tract.

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Teston believes that the land, formerly the property of a big timber company, has doubled in value since Killmer bought it two and a half years ago. Some of that appreciation is a result of its location. Atlanta is close enough that nearby crossroads towns, such as Madison and Greensboro, are sprouting coffee shops and nice restaurants. But similar vacant land twice as far from Atlanta is also heating up.

Just as other real estate investments have started losing their appeal, a growing inventory of recreational land is attracting more buyers. Major landowners, such as International Paper, Mead Westvaco and Weyerhaeuser, are divesting their forest holdings, usually to banks and insurance companies. Hardscrabble farming no longer provides a living, so kids raised on former crop land have long since marched off to Atlanta or Nashville or New York City. Old home places end up in the hands of banks and other groups of investors, who carve the property into tracts of 200 to 1,500 acres and sell it to small-scale developers and hunting clubs -- and people like Bill Killmer.

Is this a backwoods version of the investor-owned real estate glut that sank the condominium markets in Florida and Las Vegas? Possibly. Chris Hawley, chief executive officer of Mossy Oak Properties, a network of recreational-land brokers in nine states, says a recreational expanse "is just a different kind of condominium. It's just not at the beach and there are trees growing on it." But for now, Hawley, who lives and works in rural Livingston, Ala., is a very busy man.

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What's it worth?

Unlike the values for homes and crop farms, prices for recreational property -- land that's not being actively farmed -- don't appear in familiar real estate indexes. The Federal Reserve Bank of Kansas City studied wildlife-related recreational land use -- hunting, fishing, camping -- and concluded that recreational appeal adds to land values, but it couldn't pinpoint precisely how much. Besides, many land investors will tell you they have no idea what their return actually is. They just know they are ahead.

Drew Kyle is one of them. Kyle, 47, owns an office-supply business in Tuscaloosa, Ala., and is an avid investor in stocks and mutual funds. But he's also accumulating Alabama forest property 50 miles west of Tuscaloosa. Kyle added 585 acres in 2006, bringing the total owned by himself and his family to 2,300 acres.

Kyle earns a little income by harvesting timber (see the box at right), but his priorities are peace and isolation, family time at the weekend house he built on his property, and a plan to restore an old, wooden tenant-farmer's house. "I can't tell you the rate of return on any of this," says Kyle.

He could probably make an educated guess. It's likely that timber revenue offsets taxes and the cost of maintenance, such as clearing kudzu and other invasive plants. Kyle paid $360 an acre 15 years ago and $1,820 an acre in 2006 for similar land in adjacent counties. That's a compound annual growth rate of 11% -- less than the 14% annualized total return for the average real estate investment trust that owns domestic property.

But when you consider that raw land doesn't generate dividends -- a hallmark of REITs -- that's a handsome rate of appreciation. And the values seem to be accelerating. Plum Creek Timber, an investment company that's the nation's largest private owner of timberland, says land it has sold for recreational development has gone from $2,300 an acre in 2004 to more than $4,000 now. There are regional variations, but Plum Creek's chief executive, Rick Holley, thinks more and more of his company's timber holdings across the country will go from wood production to residential or recreational use, especially with wood prices falling.

Off the beaten path

When you're traveling 60 miles per hour on the highway, all recreational land looks the same. Indeed, Bill Killmer's and Drew Kyle's properties could be side by side, even though they're 300 miles apart and in two different states.

But once you leave the main road and bounce along dirt tracks in a heavy-duty four-wheel-drive vehicle, you discover that every spread has its own character, with creeks, ponds, man-made lakes, hiking trails, clearings and mountain views. Trees aren't just trees. Thirty-year-old hardwoods are valuable timber, but young pines aren't worth harvesting even for pulp and eventually need to be thinned so that they don't kill off other trees. If you're interested in anything larger than a building lot, you'll need to do more than cruise the Internet. You ought to walk the land yourself.

Teston, who calls himself a buyer's broker, says your first step is to know what you want to do with your property. If you're into hunting, you'll need a minimum of 300 to 500 acres for a varied terrain and patches of cleared pasture to plant food crops for deer and other wildlife. If you just want a secluded house with a pond and enough forest to hear the wind and the birds, 25 acres is enough. But you'll pay more per acre for a smaller piece.

Water is a big deal. If you get permission to dig a lake, which opens up opportunities for private boating, fishing and swimming, prepare to spend tens of thousands of dollars to complete the work. A tract that already has a pond or riverfront land will cost more at the outset. But in the end, water is worth the price.

President Bush's ranch in Crawford, Tex., is an example of the value of water access. Texas land appraisers say that plain-old dry pasture land in McLennan County, Tex., is worth $800 an acre today, or just about what Bush paid in 1999 for his 1,600-acre property. But creek or river access (which came with the ranch) or a lake (which the President added later) adds value. Appraisers say rural land that comes with water access in Bush's county now sells for $1,800 to $5,000 an acre.

With its security and other infrastructure upgrades, Bush's ranch isn't your run-of-the-mill property. But even if someone else had purchased it, the place would still have more than doubled in value in eight years. And the waterside section would be as much as six times more valuable.

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When Killmer purchased his land for about $2,700 an acre, he financed it by making a tax-deferred exchange for other land he owned closer to Atlanta. Buyers of rural property who own other real estate investments often use these so-called 1031 exchanges to delay paying capital-gains taxes. Other buyers simply pay cash.

If you borrow, know that a land loan is a cross between a mortgage, which is secured by the property, and a personal loan, which has more stringent terms than a mortgage. Figure on putting 25% to 30% down, with a loan term of ten to 20 years. Interest rates were recently about 8%.

Other money matters

Your best sources of credit are local commercial banks and farmers' cooperative banks. Even as lenders tighten credit for suburban housing lots and condos, they're eager to finance recreational properties, especially within three hours of a major city, because they are gaining value. Steer clear of so-called land-loan specialists, which are finance companies, not banks, and charge double-digit interest rates.

If you're buying land for personal use, the interest is not deductible. If you're buying it as an investment, the interest is considered investment interest, like the margin interest on stock purchases. That makes it deductible to the extent that you report taxable investment income, but the deduction does not shelter capital gains and qualified dividends. To get a more useful deduction to offset the cost of the land, finance part of the purchase with a home-equity loan. Interest on up to $100,000 in home-equity debt is deductible.

While you're waiting for your acreage to appreciate, it'll be yours to enjoy. But there will be expenses. Most rural land for sale lacks accommodations other than maybe a rude cabin, so you may want to build a house. Figure on paying $700 to $1,000 an acre to clear land for a pasture or a building site. You'll need a well and a septic system. Roads suitable for vehicles that don't have four-wheel drive can cost thousands of dollars. Digging a lake is a major undertaking because of drainage concerns and the need for a specialized contractor familiar with environmental and other regulations. And you'll need liability insurance, in case someone drowns in the lake you've just dug or has a hunting accident.

Without a house on the property, taxes should be low. Land is generally taxed based on its current use, so taxes on timberland may set you back as little as $2 per acre per year.

The more improvements you make, the more valuable the underlying land will be. But don't expect to cash out quickly. Well-heeled investors can afford to be patient and particular. It takes an average of about six months to sell 500 acres, and it may take as long as two years.

Still, it's comforting to know that land is one investment that won't crater on news of an unexpected earnings shortfall or the madness of crowds entering trades on computers. The saying that money is "tied up" in land endures as surely as the red-clay soil of northeastern Georgia.

Make your land pay

Unlike rental property, land doesn't provide you a regular rent check or a tax break for depreciation. But you may be able to eke out enough cash to pay your property taxes and set up a reserve fund for maintenance and small projects.

Timber. Hardwoods, such as ash, hickory, maple, oak and poplar, take as many as 50 years to mature. They're more valuable than the ubiquitous pine, which can be cut for pulp after 15 years. You'll need advice from a forester, and you'll probably sell to local sawmills.

Hunting rights. You can rent your land for anywhere from $5 an acre per year to several times that, depending on its location, the lay of the land, the length of the hunting season and the variety of wildlife. Deer and turkey are common; quail hunters pay top dollar.

Energy. Most recreational land isn't in oil-and-gas country, but you might be on the periphery of, say, a known Appalachian gas field. You could find a taker for drilling rights in exchange for a royalty of one-eighth to three-sixteenths of production plus an annual per-acre retainer.

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Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.