How to Make Money with Land: Best Ideas for Passive Income
Owning land has always been a good way to build wealth. But this can take decades of waiting for the property value to appreciate, only to then sell and face a large capital gains tax bill! It gets worse. The "buy and hold" strategy for land doesn't even cash flow so you're missing out on years of usable income.
In this article, we're not going to tell you to "pay money to make money" or to sell your land for cash value (which is generally lower than it's worth). We're going to show you creative ways to make money with land without sacrificing your wealth, money, or time.
What is a 1031 Exchange On Land?
Bad News: if you buy low and sell high in real estate, you have to pay taxes on the difference, the "gains".
Good News: the 1031 exchange lets you delay those taxes under certain conditions.
A 1031 exchange is named after Section 1031 of the Internal Revenue Code. It lets you sell a property and delay paying capital gains taxes by reinvesting the money into a similar property. This strategy helps property owners keep more of their money working for them instead of paying a big tax bill right away. It’s a way to grow your wealth faster because you can use all of your equity to invest in new opportunities, rather than paying taxes right away and losing part of your gains.
How 1031s Can Lead to Passive Income
By using a 1031 exchange, you can switch from owning land that isn't generating income to owning properties that bring in regular income. The best part is that because you didn't pay the taxes, your replacement property will have more equity available to work for you, which means you can potentially buy a higher-value property or multiple properties. This allows you to create a stronger income stream while still deferring taxes.
Example passive income could come from rental income, lease payments, or other commercial revenue. But the most passive investment you can make using 1031 exchange proceeds to create income is by investing in a Delaware Statutory Trust (DST). This approach allows you to be completely hands-off while the property is managed for you, letting you enjoy the income stress-free.
Passive Income from Land Using a DST
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust (DST) is an investment structure that lets multiple investors co-own a piece of real estate, like a commercial building, without having to manage it themselves. DSTs can be used as replacement properties in a 1031 exchange, making them a great choice for investors looking for passive income. DSTs give you the chance to own part of a big property without the stress of being a landlord.
Why DSTs are a Great Passive Investment
Passive Income: Investors in a DST get regular income without having to manage the property. The income comes from rent collected from tenants in the properties that the DST owns, and this is typically sent to investors as a monthly check.
Professional Management: The properties are managed for you, so you don't have to deal with day-to-day issues. This means no calls about broken pipes or dealing with tenant complaints—everything is handled for you, and the management team also has their own skin in the game, which means they are motivated to keep the property running smoothly.
Access to Big Properties: DSTs let you invest in large commercial properties that would normally be too expensive for one person to buy. These might include office buildings, shopping centers, or apartment complexes. This kind of access offers stability, as these types of properties often have long-term leases and multiple tenants, which helps ensure a steady income stream.
Benefits of Investing in DSTs
Tax Efficiency: DST investments can be used in a 1031 exchange, allowing you to delay capital gains taxes and keep more money working for you. This means you get the benefits of tax deferral and the income potential of high-quality real estate.
Predictable Cash Flow: DSTs usually give 4-5% cash flow annually, with monthly payouts, and 10-12% total returns when you include property value increases. This predictable income can make it easier to plan for retirement or other financial goals.
Diversification and Professional Management: Spread your investment across different types of properties, and let experts handle everything from maintenance to rent collection. This takes the pressure off you and gives you peace of mind.
Estate Planning: DSTs are easier to pass down to heirs compared to physical real estate, making them a good option for estate planning. You can leave your investment to your family without the complications that can come with traditional real estate.
Important Considerations
Before investing in a DST, there are some things to think about:
Illiquidity: DST investments are usually illiquid for 5-7 years. This means you can't easily sell them until the trust sells the property. You need to be prepared to keep your money in the investment for several years.
Limited Control: As a DST investor, you don't get to make decisions about how the property is managed. You are relying on the professional managers, which can be good, but you also have to trust their decisions.
Market Risks: The value of the real estate can change based on the market, which could affect your income and the value of your investment. It’s important to remember that all real estate investments carry some risk.
Investor Requirements: DSTs usually require investors to be accredited, meaning you must meet certain income or net worth requirements. This makes DSTs more accessible to people with higher incomes or more savings.
There's a lot more detail about this strategy that must considered. So if you're curious about whether your situation will work for a 1031 to DST strategy, just reach out and we can assess your needs.
Other Ways to Make Money Off Land Using 1031s
While DSTs are a great way to create passive income, there are other strategies to consider too. Below are some other ways to use 1031 exchange proceeds to make passive income from land. These can be considered replacement properties for your 1031 exchange proceeds from your land.
Triple Net Leases (NNNs)
Triple Net Leases (NNNs) are commercial lease agreements where the tenant pays for property taxes, insurance, and maintenance. This type of lease gives you steady income with minimal responsibilities as a landlord. With NNN leases, you don’t have to worry about unexpected expenses, because the tenant handles most of the costs.
Why It Works: With NNN leases, you get predictable rental income while the tenant pays for most of the property costs. This can make it a very hands-off way to invest in real estate.
Passive Benefit: This type of lease is perfect for those who want hassle-free rental income. You still own the property, but the tenant takes care of almost everything else.
Tenants-in-Common (TICs)
Tenants-in-Common (TIC) arrangements let you co-own a property with other investors while keeping your own ownership share. Similar to DSTs, TICs give you access to high-value properties without having to manage them. You share in both the income and the costs with the other owners.
Why It Works: You can exchange land for a share in a high-value commercial property that is professionally managed. This gives you an opportunity to earn passive income without the hassle of managing a property.
Passive Benefit: Provides monthly income without the difficulties of property management. You can enjoy the benefits of owning commercial real estate without the day-to-day responsibilities.
Rental Properties
If you want more control over your investment but still want to generate passive income, you can exchange your land for residential or commercial rental properties. Rental properties can provide consistent income and the chance for your investment to grow in value over time.
Why It Works: Rental properties provide monthly rental income and the chance for the property to increase in value. This helps you build wealth while also getting regular cash flow.
Passive Benefit: You can hire property management companies to handle daily responsibilities, making it more passive. This allows you to still get rental income without being directly involved in managing the property.
Real Estate Crowdfunding Platforms
Real Estate Crowdfunding Platforms let you pool money with other investors to buy real estate. Some platforms allow non-accredited investors to join, while others require accreditation. Crowdfunding can be a way to get involved in real estate with less money and without needing to manage properties.
Why It Works: Crowdfunding platforms give you access to different real estate projects with a low barrier to entry. You can invest in projects that would otherwise be out of reach.
Passive Benefit: Earn a share of rental income or property appreciation without having to manage the investment directly. This makes it an easy way to diversify your investments and create passive income.
Conclusion
Making money with land doesn't have to mean just waiting for property values to go up. With strategies like a 1031 exchange, you can turn land into passive income through investments like DSTs, Triple Net Leases, TICs, and rental properties. Each of these methods has its own benefits, like tax efficiency and professional management. Understanding the different ways to use your land can help you make the best choice for your financial future.
Whether you want to diversify your investments, get predictable cash flow, or avoid the hassle of managing properties, there is a strategy that will work for you. The key is to understand your options and choose the ones that best fit your needs and goals. Always think about your financial situation, long-term goals, and how much risk you can handle when choosing the best way to make passive income from your land.
