Among humorist Will Rogers' many memorable quotes is this little ditty: "Buy land. They ain't making any more of the stuff."

That said, real estate investing seems to come in two different flavors. One involves acquiring a parcel of land with a building on it for the purpose of living in it or collecting rent. This effort is deemed a respectable, if not relatively safe, investment. The other way is to purchase a chunk of raw land, which is viewed by some as occupying the riskier fringe of the alternative investment space.

Real estate as a whole took it on the chin during the recession (no surprise, given that it helped spark the conflagration), and there are numerous land parcels out there that are empty reminders of planned developments that never got off the ground. But people who buy these properties and ready them for development say that these are the very reasons why now's the time to get in before the inevitable economic recovery.

"All of our research and acquisition focus since the housing bubble burst has been on the U.S.," says Rob Leinbach, chief operating officer at Walton International Group (USA) in Scottsdale, Ariz. "We view the current environment for acquiring land here as an incredible buying opportunity. We're all cash buyers, so we typically come out of these economic downturns stronger because that's when we accumulate our assets."

Walton's Calgary, Alberta-based parent company focuses on predevelopment land asset management, and until recently, most of that involved properties in Alberta. The company typically works through broker-dealers to find accredited investors to put money in limited partnerships, buying either specific properties or blind pools. Walton entered the U.S. market in 2006 and recently rolled out a new product for the registered investment advisor channel.

As of March 17, 2009 (the date of Walton's most recent track record audit), the simple annualized rate of return for the 31 Alberta properties the company had fully exited (i.e., bought, arranged entitlements for and ultimately sold to developers) was 25.48%. The company hasn't yet fully exited properties in other states and provinces where it does business--Ontario, Arizona, Georgia and Texas.

There are numerous private-equity funds that buy distressed properties and raw land, but evidently only a few companies are reaching out to the advisory market to find investors. Walton is one of them. Another is the Shopoff Group, an Irvine, Calif.-based real estate investment firm that includes a real estate investment trust and a related broker-dealer. The company currently owns properties in Arizona, California and Hawaii.

"Our experience is that working with financial advisors is a long dating process," says William Shopoff, the company's president and chief executive. "We talk to some for two to three years for them to understand our product and how it fits with clients. Only a subset of financial advisors participate in the alternative universe."

From 2006 through 2008, Shopoff says, his company sold $28.8 million in properties where it had $10 million invested. That resulted in a 32% annualized sales profit.

"This isn't a hope business where we buy property and hope it goes up," Shopoff says. "We actively work with municipalities to enhance value during our holding period so that when we liquidate we get an above-average payback."

Buy-N-Hold
Given its illiquidity, raw land isn't a place to make a quick buck. Nor do most parcels generate income during their holding periods (and if they are individually owned, they can even create negative cash flow thanks to ongoing property taxes). There's no depreciation allowed on raw land for federal income tax purposes, municipalities call the shots on a piece of land's ultimate fate, and environmental regulations can create major snags.

"I have no clients in raw land, nor can I think of a situation where I'd recommend it," says Jeffrey Voudrie, president of Legacy Planning Group Inc. in Johnson City, Tenn. "Raw land is speculative and it's very illiquid. You typically want some kind of exit strategy with an investment.

"Even direct-placement REITs that invest in office buildings have an exit strategy either by going public or selling the buildings," he adds. "You collect some income along the way with some type of future exit. Raw land can sit for years and never move."

And Voudrie doesn't buy the argument that investors should purchase raw land now in hopes of cashing in on the rebound. "The fallacy to that argument is that land prices will go back to where they were a few years ago," he says. "If land prices were artificially inflated due to cheap money on a speculative binge, I could easily posit that the chance of land values getting back to that level are small."

One advisor who currently has clients in raw land deals stresses the need for careful vetting. "The challenge with doing something like this is you're giving your client's money to someone outside the system, so to speak," says Michael Ling, founder of Berkeley Inc., an RIA in Boise, Idaho. "Where people get into trouble is when it's outside the system. So we investigate them very carefully."

Due Diligence
Legitimate players in this space say they welcome scrutiny from financial advisors. "All of the advisors we work with vet us carefully," says Martin Stever, the president of Pacific West Land LLC in Bainbridge Island, Wash. "They look at our track record and talk with people who've invested with us."

Pacific West Land has holdings valued at nearly $200 million in Arizona, Colorado, Nevada and Southern California. Its target market is accredited investors who want exposure to the residential and commercial development process.

"When people come to us it's typically because we're filling a niche for them and they want exposure to real estate," Stever says. "I believe a lot of advisors use us to provide their clients with something they can't pick up on E*Trade. Usually it's for clients for whom giving a long-term capital gain is important. We get people with high current income such as doctors, financial managers and the like. That's because almost all of our gains are long-term capital gains. And because they have high income, they can be patient."

Stever says the average holding period for investors in the company's roughly 100 projects has been around five and a half years. He notes that the cumulative gross internal rate of return (IRR) on its projects is more than 31%, and that investors have averaged 23% net IRR over the company's 28 years in business.

"I say you shouldn't try to put a client with us unless they're at least two times the threshold of normal accreditation," Stever says. "They should have at least $2 million in investable capital or a very high income because our investments are very illiquid and no one should overexpose themselves to an illiquid investment."

There's no early redemption with Pacific West Land's investments. "Ours are designed for people to be around for the ride," Stever says. "That's why it's important that it be only a small portion of a portfolio."

Because the deals are structured as limited liability companies with partnership-like structures, investors need to file an IRS Schedule K-1 tax form. Stever says there might be some passive losses in the early years of the investment because there's no income to offset passive loss expenses on the K-1.

The company is currently raising money for its first fund, the Pacific West Distressed Asset fund, which was set up to buy nonperforming notes, first trust deeds and real estate from banks at Federal Deposit Insurance Corporation (FDIC) auctions, as well as directly from distressed sellers. The fund's investment minimum is $100,000, and the annual management fee is 1.5%.

Michael Ling, the RIA in Boise, first looked into Pacific West Land about three years ago, and a short time later had the chance to observe the company up close when it acquired property in Boise. "When we vetted them, we called their bank and current and past investors," Ling says. "We had an attorney in town read over their material."

In the end, his firm felt comfortable investing with Pacific West Land, and it currently has some client money placed in projects in Boise and in Arizona. "We put no more than 3% to 4% of a total portfolio into this type of investment," Ling says. "Even as part of the real estate component in a portfolio, you don't want it to be more than 10%."

Ling says these investments are treated as capital gains, and that he places them mainly in taxable accounts.

Patience Required
The equity markets have snapped back quickly since March, but investors probably shouldn't expect the same for real estate. "The land business probably won't get as quick a lift that the stock market got," says William Shopoff. "Our business plan at minimum looks out two years, and sometimes as long as six to eight years for capitalizing on the marketplace. Our strategy is that prices will recover. They don't have to fully recovery for us to execute our plan."

In most cases, investors in Shopoff properties need to be accredited. To attract non-accredited investors, the company in 2006 formed Shopoff Properties Trust Inc., a publicly registered, nontraded REIT with a minimum investment of $20,000.

Its affiliated broker-dealer, Shopoff Securities Inc., is the distribution company for Shopoff Properties Trust. It works with other broker-dealers as well, most of which are fee-based because it's a no-load product.

Holding periods for Shopoff's limited partnership deals can last as long as eight to ten years. There are no redemption opportunities for those shares until the properties are sold.

"Many of my clients put this investment into a 401(k) or IRA because it's not money they'll actively trade," Shopoff says.

How much the real estate market recovers and when depends on the specific market and the overall economy. While the market will eventually regain some lost ground, it's a strong recovery that will drive returns.

"Population growth is what really matters," Stever says. "As long as populations increase in overcorrected markets, they'll bounce back. The markets really in trouble are those with flat or declining population. It's important to think of real estate on a market-by-market basis."

Rob Leinbach from Walton International says residential construction has slowed because the market overbuilt from 2004 through 2006.

"Home builders won't be able to build homes for the next couple of years due to existing foreclosed inventory," Leinbach says. "That provides a tremendous opportunity to buy land now and plan that land and get it entitled in anticipation of the next upturn.

"Anyone can buy an acre of land," he adds. "But to accumulate 2,000 acres in order to build a high-density master plan community takes a large capital commitment and specific expertise."

And for investors looking for a return on investment, it takes a lot of patience.