Purchase farmland or sell it?

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jornsy
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Purchase farmland or sell it?

Post by jornsy » Mon Mar 03, 2014 10:04 pm

My wife and one other relative have inherited some farmland. We need some help determining if we should buy out the other person's share of the farmland or just sell it and split the money.

Wife is 45, I'm 50. We have three children to put through college (Junior in HS, 8th grade, and 6th grade). I would like to retire in ten years after our kids have graduated from college at age 60. Whether we have reached our retirement number is another topic that we'll ask in another post sometime in the future.

We have approximately $800,000 invested for retirement. ($600,000 in 403b and 457b and $200,000 in two Roth IRAs). We have $30,000 in 529s for each child (total $100,000) and about $500,000 in after tax investments.

The farmland has rental income of $16,000 annually, less approximately $1,000 for taxes so $15,000 net.

In order to buy out the other person's share of the farmland, we would have to come up with $130,000 (maybe a little more). So we have four options below.
  • We could take the $130,000 out of our "after tax" investments and pay for the farmland in full. This would be about 1/3 of our total after tax investments.
  • We could borrow the $130,000 at 4.5% interest from a bank. It would be a 5-yr ARM. No longer terms available.
  • We could finance a lesser value and take some money out of investments in order to buy the farmland.
  • We could have the farmland sold at an auction and take the proceeds and invest it using the Boglehead philosophy like our all our investments (3-fund method). If sold, our share would be approximately $300,000 - $500,000.
It is my understanding that if the estate sells the land and we inherit the proceeds from the sale, then we don't have any estate taxes to pay. If we purchase the land and later decide to sell it, we will owe capital gains taxes on the amount above our stepped-up value from the appraised value of today. Is my assumption correct?

We are leaning towards selling the land and investing the money in order to help with the kids college expenses if needed or help support us in our retirement. That way we don't have to worry about paying capital gains on the future sale of the farmland and/or worry about splitting the land among our three children in the future. We would also have full control over the money/investments at Vanguard.

Then again the farmland would be a source of steady income during retirement and could increase over time. Would the farmland income be a good match (increase our diversification) with our mostly index mutual funds and bonds investments? Would the farmland be a good investment if we have to take money from our after-tax investments and thus losing out on the return on that money?

I guess we are asking if we should diversify and become farmland rental income owners or continue having our entire investment portfolio (after tax and tax-deferred investments) in mutual funds and bond funds?

Your advice, opinions and recommendations are appreciated as always.

thewizzer
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Re: Purchase farmland or sell it?

Post by thewizzer » Mon Mar 03, 2014 10:25 pm

You don't touch on whether or not you or your wife has any emotional attachment to this land. Is this the old family farm that one of you grew up on? When talking about it from a strictly financial sense, it shouldn't make a difference. But since none of us are robots, maybe it does.

Personally, I agree with the way you are leaning. I am probably in a closer position to your children than to you, and I can tell you that I'd be grateful to just receive a cash inheritance as opposed to an estate that needed to be split up (especially in my case with two siblings that haven't talked to one another in years).

I'll leave it to smarter folks to do the real math, but off the top of my head I would think you can make a better ROI on half a million dollars. However, how sure are you that the land would sell for this much?

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slow n steady
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Re: Purchase farmland or sell it?

Post by slow n steady » Mon Mar 03, 2014 11:54 pm

Farmland where I grew up is at an all-time high. I would personally sell it.

If you inherited $300,000 in cash, would you even think about buying farmground with it? Not really the same thing but it's something to think about.

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grabiner
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Re: Purchase farmland or sell it?

Post by grabiner » Tue Mar 04, 2014 12:18 am

slow n steady wrote:Farmland where I grew up is at an all-time high. I would personally sell it.

If you inherited $300,000 in cash, would you even think about buying farmground with it? Not really the same thing but it's something to think about.
And it's actually more attractive to sell the farmland in your actual situation than if you had inherited the cash, since you have an extra cost (in loan interest or capital-gains tax on stock sales) if you have to raise extra cash to buy the farmland.
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jlawrence01
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Re: Purchase farmland or sell it?

Post by jlawrence01 » Tue Mar 04, 2014 2:03 am

This is a big discussion topic in families where the parents are farmers and the children have no interest in farming. What I have seen in many families is that there is generally one heir who wants to hold onto the land for nostalgic reasons while the other heirs want to sell the property and cash out either to supplement their retirement savings OR to pay for their children's education. It can create a lot of ill-will amongst the heirs. Personally, I would always recommend that the parents state in their will that the land be sold EXCEPT in the case where one or more children are actively farming the land.

My vote would be to sell the land.

If you don't sell it, you need to have some ideas as to how to handle the following:

What will you do with the house and other buildings?
Can you rent out the land to other farmers? Will you earn enough income from it?
How are you going to subdivide the land? Please don't subject your grandchildren to receiving a small portion of the farm.

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in_reality
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Re: Purchase farmland or sell it?

Post by in_reality » Tue Mar 04, 2014 2:42 am

I would lean towards selling it too. We didn't do that though.

Here is what I know:

That farm seems about twice as big as the one I jointly inherited. Ours is "small acreage" which impacts who will rent it. Higher paying large agribusiness' won't. So then there is non-payment risk -- farmers don't always do well you know. If you factored in non-payment risk, and the loan cost, and what you could get by investing in something else ... well do you have an idea if rental income is reliable? If it's a neighbor who is nearing retirement then what happens after that?

Ours has 6 owners and we share the rent. Luckily one family member is really honest and a cousin put up a log cabin where the farmhouse was. My decision was not as large as yours and I am just going along with whatever my aunt and uncles suggest since they grew up there.

Who would take care of renting it out? Is that something you are comfortable doing?

berntson
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Re: Purchase farmland or sell it?

Post by berntson » Tue Mar 04, 2014 2:52 am

I would think hard about keeping the land. David Swenson likes using timber for the Yale endowment to diversify away from equity and bonds. After a bit of reading, I concluded that owning a timber ETF is nothing at all like owning timber land. But owning cropland is rather like owning timber land and has many of the advantages that Swenson likes for timber. You might take a look at Swenson's books (both for the individual investor and the institutional investor) and see if his reasoning about timber land has any bearing on your situation.

You could look into paying someone to custom farm the land. I'm from a farming background and, where I'm from, there are lots of farmers looking for reliable custom work. The advantage of this arrangement is that in exchange for taking a bit of risk each year (buying seed, paying for spraying, paying for harvesting) you get a larger expected return from your investment. Each year you get a harvest of commodities off the land (I'm assuming it's cropland?). You can defer selling some or all of the crop for tax purchases (or for need-based financial aid purposes). You can donate part of the crop to charity and never pay taxes on it.

Best of all, the farm economy is very much not correlated with the overall stock market. The 70s were bad for stocks, but great for farming. The 80s were terrible for farming and great for stocks. Since 2000, the market has experience two crashes, but farming has had a long bull market. Farm profits were at record highs exactly when stocks were cheap. For someone with both farmland and equities, this is an amazing situation to be in.

The main concern is that land prices are in a bubble. I'm not sure whether they are or not. Land prices have tripled where I'm from because the price of corn has tripled. This is not an internet-stock situation in which an unprofitable assets are beings sold at absurd multiples. Farmland is expensive precisely because it is presently highly profitable. But that could all change.

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in_reality
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Re: Purchase farmland or sell it?

Post by in_reality » Tue Mar 04, 2014 2:57 am

jornsy wrote: We are leaning towards selling the land and investing the money in order to help with the kids college expenses if needed or help support us in our retirement. That way we don't have to worry about paying capital gains on the future sale of the farmland and/or worry about splitting the land among our three children in the future.
Let's say you do leave it to your three children, they wouldn't have to pay capital gains on the sale right? Any appreciation would just be theirs - right?

berntson
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Re: Purchase farmland or sell it?

Post by berntson » Tue Mar 04, 2014 3:16 am

Alright, I did some poking around, and I'm now in the worried that land prices are in a bubble camp. Farmland is a great investment, but not at any price.

Here's why I'm worried.

Image

Look at rent as a percentage of value! It's fallen by more than half in the last 20 years. This looks at least a bit like the housing bubble. When the renting/buying ratio gets out of whack, that often signals a new bubble.

Looking at commodity prices doesn't help either. Corn prices have risen since 1994, but they are now "only" 2.7 times what they were in 1994. Land prices, on the other hand, are 5.2 times what they were in 1994. This looks ominous.

On the other hand, if you are willing to hold the land for the long-term, you don't care what the land is valued at. You care about what the rent will be. Rents are typically more stable than land valuations. So that's something to take into consideration.

chicagobear
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Re: Purchase farmland or sell it?

Post by chicagobear » Tue Mar 04, 2014 5:50 am

Now would be an excellent time to sell farmland.

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frugaltype
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Re: Purchase farmland or sell it?

Post by frugaltype » Tue Mar 04, 2014 5:54 am

It now occurs to me that I was reading about farming in RI recently. It was about the high demand for farmland and one guy having to rent in Mass since he couldn't find any farmland available in RI. I think farmers here are not big agribusiness, the state/land just isn't suitable for that, but growing for farmers markets, restaurants, specialty, etc.

I just found on the web that the top five agri pursuits in RI are "greenhouse and nursery products, sweet corn, dairy products, potatoes." There is a dairy cooperative Rhody Fresh, so people in that might be more reliable renters if your land were here, which I understand it isn't.

I am now wishing I owned some farm land.
Last edited by frugaltype on Tue Mar 04, 2014 4:05 pm, edited 1 time in total.

Bacchus01
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Re: Purchase farmland or sell it?

Post by Bacchus01 » Tue Mar 04, 2014 7:26 am

Farm land has really gone up a lot. Will it keep going? Not sure, but I find it hard to believe that over the long run it will not. There are fewer and fewer acres of farm land and more and more people. Corn is high because of subsidies on ethanol, but can it sustain?

Personably, I would buy out the land. I have looked for land just like you have, but costs are very high for the ROI. You have an advantage in that you already own half of it. Could you do better elsewhere with less work and potentially less risk? Maybe.

RNJ
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Re: Purchase farmland or sell it?

Post by RNJ » Tue Mar 04, 2014 7:53 am

A couple of questions which may or may not be material with respect to your decision:

How confident are you in your estimate of what the land would sell for at auction? Alternatively, what is the likelihood of significant disappointment in the sale price?

Are the current tenants long-term, reliable, easy to deal with?

Caveat - I know less than nothing about farming.

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tadamsmar
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Re: Purchase farmland or sell it?

Post by tadamsmar » Tue Mar 04, 2014 8:12 am

You could sell it and fund a 529 for college education. New York's plan is best unless your state has a big tax break.

Would you be absentee landlords? I owned farmland like that and there were a good many hassles. Stuff happens on farmland when the owner is not around.

Jack FFR1846
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Re: Purchase farmland or sell it?

Post by Jack FFR1846 » Tue Mar 04, 2014 8:44 am

slow n steady wrote:
If you inherited $300,000 in cash, would you even think about buying farmground with it?
That is exactly the question to ask.

I'd go a step farther and ask.....if you wanted to be a farmland renter, why have you not yet bought farmland and rented it out?
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papito23
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Re: Purchase farmland or sell it?

Post by papito23 » Tue Mar 04, 2014 8:51 am

Buffett bought 400 acres in 1986... precisely at the low point of the huge farm bust. (Here's historic Iowa prices as a proxy). He calculated the return as 10%, now (as seen above) it's 3.0%.

In my uneducated opinion, you have plenty of common stocks and land would be a great diversifier. Land and stocks both seem high now, and land "seems" higher in relative terms.

However, as they say, they aren't making any more land. If it is farmed with care (find a good tenant), it will provide wealth in perpetuity, as long as rain falls on the earth and the sun keeps shining. If you take the long view, the market value over the next 20 years is (somewhat) irrelevant... but the crops will keep rolling in.

However, if you are strictly a numbers person, like Buffett and many people here, it's a hard choice.
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

jornsy
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Re: Purchase farmland or sell it?

Post by jornsy » Tue Mar 04, 2014 9:02 am

My wife and I don't have any emotional attachment to the farmland. We purchased the house and land that she grew up in from her parents 18 years ago, so we already own the property that she has an emotional attachment too. Actually, the property (5 acres, house and some buildings) have been in her family for over 100 years and the house was built by her relatives.

The farmland that she inherited is located adjacent to our property, so it's easy to keep an eye on the property and monitor what is being planted and so forth. We had a couple of other nearby farmers contact us about renting the farmland, so renting it out would not be a problem.

The appraised value of the land was about $575,000, so it should fetch at least that amount (we can set a minimum). Our friends in a similar situation just auctioned their farmland which is comparable to ours (in value and soil sample) and it sold for $4,000 per acre more than the appraised value. That's why I think ours could go for more than the appraised value.

Thank you all for your advice thus far. We appreciate the varying opinions, and so far it looks like most people are for selling the farmland. I know farmland is at its all time high and that would be another good reason to sell now. But I can also see the rental income as a fixed asset paying $16,000 per year in the future.

I think slow n steady makes a great point,
If you inherited $300,000 in cash, would you even think about buying farmground with it?
I don't think we ever thought about purchasing farmland as an investment. I think we are more comfortable investing in mutual funds and bonds.

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in_reality
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Re: Purchase farmland or sell it?

Post by in_reality » Tue Mar 04, 2014 9:07 am

Jack FFR1846 wrote: I'd go a step farther and ask.....if you wanted to be a farmland renter, why have you not yet bought farmland and rented it out?
Perhaps they were expecting to inherit some...

If you do decide you might want to be a farmland renter, I'd definitely attend a workshop on it.

For example, one place stated "Great care should be taken when establishing a lease, as there are many issues to address in writing between landowner and farmer, such as lease tenure, infrastructure development, restrictions and permitted uses." Myself, I am not sure I could tackle that not having farmed.

I see some Universities have extension programs whose faculty are presenting at those workshops. There really seems to be a lot of issues that you might want to discuss before committing to it. You work and have three kids. You have to prioritize your time. Maybe you could talk to one of those faculty who are very familiar with it. They might give you the best advice.

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papito23
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Re: Purchase farmland or sell it?

Post by papito23 » Tue Mar 04, 2014 10:41 am

FYI Here is a side-by-side comparisonI did with the S&P500 and Iowa farmland, 1950-2011. Maybe I'll update it in a few years...
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

MP173
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Re: Purchase farmland or sell it?

Post by MP173 » Tue Mar 04, 2014 10:45 am

A few questions and comments:
1. Is the $16,000 the entire income, or just your half?
2. How many acres?
3. Which state? Is this a major agriculture area?
4. How close are you to a major metropolitan area? Is subdividing the land in the future a consideration (for housing)?
5. Mineral rights? Is there a possibility of either natgas or oil? If so, what is your mineral rights situation? Do you hold all or just a portion?
6. You seem fairly comfortable with your financial situation. The farm land could be a great diversification financially for you.

Here is my situation...I inherited a small farm (50 acres) and there is an emotional attachment, so I will not sell and it will pass on to my sons. I have received unsolicited offers which make selling the land a no brainer. The yearly return from crops and oil royalties (yes, there are oil wells) would be in the 3% range.

However, I look at this as a portion of my overall portfolio and this pretty much covers real estate investment for me. I tried the house renting and that was a pain and sold the house. The mineral rights are the kicker right now. While there is oil currently being produced the wild card is natural gas. It could be years away, but so what? It is paid for and the property taxes are a joke (low).

Yes, farmland is at an all time high. You could probably cash out right now and do quite well. Where would you invest the cash? What returns would you expect from that investment (stocks, like farmland is at an all time high).

You will have NO PROBLEM finding farmers to either cash rent or to farm on shares.

Good luck on your decision.

Ed

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papito23
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Re: Purchase farmland or sell it?

Post by papito23 » Tue Mar 04, 2014 10:49 am

jornsy wrote: The farmland that she inherited is located adjacent to our property, so it's easy to keep an eye on the property and monitor what is being planted and so forth.
...
I think slow n steady makes a great point,
If you inherited $300,000 in cash, would you even think about buying farmground with it?
I don't think we ever thought about purchasing farmland as an investment. I think we are more comfortable investing in mutual funds and bonds.
Being adjacent is huge, and your mere presence will probably improve tenant relations. I'm surprised that you have no emotional connection to land that close. There is another value there that is not paper investments will not get you... you control what happens next to you. As in, actual physical space and time. Hog farm? Windmill? Racecar track? It's up to you, not someone else or the county officials. That's an enormous option, IMO. Would be interested in hearing what you decide!
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

Bfwolf
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Re: Purchase farmland or sell it?

Post by Bfwolf » Tue Mar 04, 2014 10:55 am

Put me in the "sell it" camp. You wouldn't buy farmland if you didn't inherit it, so how is this any different?

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happymob
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Re: Purchase farmland or sell it?

Post by happymob » Tue Mar 04, 2014 10:56 am

jornsy wrote:Thank you all for your advice thus far. We appreciate the varying opinions, and so far it looks like most people are for selling the farmland. I know farmland is at its all time high and that would be another good reason to sell now. But I can also see the rental income as a fixed asset paying $16,000 per year in the future.
But it's not fixed. If commodity prices are cut in half, what will happen to rent? What will happen to the price of the land. Rent will be cut significantly - perhaps in half. Land values, in that scenario, will be cut by more than half. There is real risk here. You can't simply treat it like a bond.

That said, I'm not selling the grassland or cropland I own.

Tomahawk1
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Re: Purchase farmland or sell it?

Post by Tomahawk1 » Tue Mar 04, 2014 10:58 am

papito23 wrote:FYI Here is a side-by-side comparisonI did with the S&P500 and Iowa farmland, 1950-2011. Maybe I'll update it in a few years...
Thanks, this is awesome.
Did you factor in fees and selling costs in your computation though? I mean: if you are to sell farm land, you probably incur brokerage costs etc.

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BL
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Re: Purchase farmland or sell it?

Post by BL » Tue Mar 04, 2014 11:12 am

I don't think we ever thought about purchasing farmland as an investment. I think we are more comfortable investing in mutual funds and bonds.
That sounds like the answer to me. You also say you don't have an emotional attachment to it, so what does that leave?
I agree that having a connection with neighbors, etc., is an advantage, usually.

PocketChangePension
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Re: Purchase farmland or sell it?

Post by PocketChangePension » Tue Mar 04, 2014 12:09 pm

Correct me if I'm wrong here, but this doesn't make sense...

You need to pay $130,000 to buy out the other shares.

If the property is sold as it currently sits, your share is $300,000-$500,000

So unless there is something I missed, why don't you spend $130,000 to buy out the other shares, then sell the property for $600,000-$1,000,000? (I assume doubling the number is correct, since you said it's split between your wife and one other sibling)

sls239
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Re: Purchase farmland or sell it?

Post by sls239 » Tue Mar 04, 2014 12:16 pm

I think it is important to realize that your one small farm is not a diversified investment in farmland. That really changes how you should look at risk. You can't look at a graph of averages and determine your risk from that because you don't know if that particular property will perform anything like the average.

Stocks and bonds have an advantage because diversifying within those asset classes is cheap and easy.

jornsy
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Re: Purchase farmland or sell it?

Post by jornsy » Tue Mar 04, 2014 12:43 pm

A few questions and comments:
1. Is the $16,000 the entire income, or just your half? (It is the entire income of that property)
2. How many acres? (77 acres, 66 tillable)
3. Which state? Is this a major agriculture area? (central Illinois)
4. How close are you to a major metropolitan area? Is subdividing the land in the future a consideration (for housing)? (We are 20 miles from Springfield. Our nearest neighbor is a 1/2 mile away. Our immediate neighbors are Mr. Corn and Mrs. Soybean and they rotate each year!) ;-)
5. Mineral rights? Is there a possibility of either natgas or oil? If so, what is your mineral rights situation? Do you hold all or just a portion? (Not that I'm aware of in central Illinois)
6. You seem fairly comfortable with your financial situation. The farm land could be a great diversification financially for you.
Correct me if I'm wrong here, but this doesn't make sense...

You need to pay $130,000 to buy out the other shares.

If the property is sold as it currently sits, your share is $300,000-$500,000 (I didn't mention there is another piece of property that is worth about $180,000. The other relative wants to keep that property (they have an emotional attachment to property B), so in order to split the value equally, we need to buy out their portion of property A, hence the $130,000)

So unless there is something I missed, why don't you spend $130,000 to buy out the other shares, then sell the property for $600,000-$1,000,000? (I assume doubling the number is correct, since you said it's split between your wife and one other sibling) (I guess we could do that, but the relative might get mad if it sells for more than the appraised value of the property which is $575,000. Of course they could sell there property above the appraised value now or in the future too)
Thanks everyone. We have many more aspects to think about before we make our decision. We appreciate all the input!

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SC Hoosier
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Re: Purchase farmland or sell it?

Post by SC Hoosier » Tue Mar 04, 2014 1:07 pm

My father has some Indiana farmland that my sister and I will probably inherit someday. I live in South Carolina. I have no wish to negotiate rent with farmers or develop contracts. I will probably sell it and buy REITs. I do think that people are going to continue to need food, so farmland is going to continue to be valuable. With more people and less land, the values should rise. I have enjoyed reading the discussion and I look forward to hearing what decisions are made by the OP, if that is possible.
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.

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Re: Purchase farmland or sell it?

Post by Hawkeye_Saver » Tue Mar 04, 2014 1:47 pm

I'm from Iowa so I'm surrounded by farmers and farmland. The land market here has come to a screeching halt with some auctions ending in no-sales. With commodity prices dropping in half farmers can't make money at the crazy prices sellers still want. If you buy don't do it at anywhere near the high prices for your area. Things have been pulling back here for about the last 9 months.

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frugaltype
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Re: Purchase farmland or sell it?

Post by frugaltype » Tue Mar 04, 2014 4:11 pm

jornsy wrote:
(I guess we could do that, but the relative might get mad if it sells for more than the appraised value of the property which is $575,000. Of course they could sell there property above the appraised value now or in the future too)
Have them use their own appraiser, as well as your having an appraiser.

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Jay69
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Re: Purchase farmland or sell it?

Post by Jay69 » Tue Mar 04, 2014 4:20 pm

The biggest key to me is how fast will the big city get to you?

If it will happen by the time your kids get ready to retire it may work out well for them. I live in an area of transition from farm to city and the farmers are crying to get the city to change the land use to a business park, high density housing etc.
"Out of clutter, find simplicity” Albert Einstein

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papito23
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Re: Purchase farmland or sell it?

Post by papito23 » Tue Mar 04, 2014 10:44 pm

Tomahawk1 wrote:
papito23 wrote:FYI Here is a side-by-side comparisonI did with the S&P500 and Iowa farmland, 1950-2011. Maybe I'll update it in a few years...
Thanks, this is awesome.
Did you factor in fees and selling costs in your computation though? I mean: if you are to sell farm land, you probably incur brokerage costs etc.
No, I did not include fees (I wasn't analyzing a re-balance, or get-in-get-out strategy, just holding) nor did I include taxes, which could make a big difference as well.

EDIT:
I would caution drawing much from my analysis, as the chart itself is with income excluded. I suppose it wouldn't be too much to add in S&P dividends and farm income (dividends) with some Excel magic. Some day...
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

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Re: Purchase farmland or sell it?

Post by Valuethinker » Wed Mar 05, 2014 10:49 am

jornsy wrote:My wife and one other relative have inherited some farmland. We need some help determining if we should buy out the other person's share of the farmland or just sell it and split the money.

Wife is 45, I'm 50. We have three children to put through college (Junior in HS, 8th grade, and 6th grade). I would like to retire in ten years after our kids have graduated from college at age 60. Whether we have reached our retirement number is another topic that we'll ask in another post sometime in the future.

We have approximately $800,000 invested for retirement. ($600,000 in 403b and 457b and $200,000 in two Roth IRAs). We have $30,000 in 529s for each child (total $100,000) and about $500,000 in after tax investments.

The farmland has rental income of $16,000 annually, less approximately $1,000 for taxes so $15,000 net.

In order to buy out the other person's share of the farmland, we would have to come up with $130,000 (maybe a little more). So we have four options below.
  • We could take the $130,000 out of our "after tax" investments and pay for the farmland in full. This would be about 1/3 of our total after tax investments.
  • We could borrow the $130,000 at 4.5% interest from a bank. It would be a 5-yr ARM. No longer terms available.
  • We could finance a lesser value and take some money out of investments in order to buy the farmland.
  • We could have the farmland sold at an auction and take the proceeds and invest it using the Boglehead philosophy like our all our investments (3-fund method). If sold, our share would be approximately $300,000 - $500,000.
It is my understanding that if the estate sells the land and we inherit the proceeds from the sale, then we don't have any estate taxes to pay. If we purchase the land and later decide to sell it, we will owe capital gains taxes on the amount above our stepped-up value from the appraised value of today. Is my assumption correct?

We are leaning towards selling the land and investing the money in order to help with the kids college expenses if needed or help support us in our retirement. That way we don't have to worry about paying capital gains on the future sale of the farmland and/or worry about splitting the land among our three children in the future. We would also have full control over the money/investments at Vanguard.

Then again the farmland would be a source of steady income during retirement and could increase over time. Would the farmland income be a good match (increase our diversification) with our mostly index mutual funds and bonds investments? Would the farmland be a good investment if we have to take money from our after-tax investments and thus losing out on the return on that money?

I guess we are asking if we should diversify and become farmland rental income owners or continue having our entire investment portfolio (after tax and tax-deferred investments) in mutual funds and bond funds?

Your advice, opinions and recommendations are appreciated as always.

I suspect as a financial investment this does not stack up. It doesn't look like you are getting land 'on the cheap' relative to market value?

Central Illinois has some of the best farm land in the world. Excepting the (environmental) horror that is (first generation) biofuels, the world is still going to need more biomass- 10 billion people by mid century. So one has to think in the long run food prices are at least likely to stay constant (people will eat more meat etc. as they get wealthier; fish stocks are fast depleting, etc.). Probably in USA farms keep getting bigger and more corporate-- landowners might well be Chinese or Arab companies, etc.

So it really comes down to emotional factors. If owning this land matters to you or your wife emotionally you might do it. Probably makes your place more saleable when you do come to sell. But it mops up your liquidity and I am a big fan of having assets that are easily converted into cash.

Additional consideration: how to finance. Mortgage money is the cheapest money you ever get. *but* you need to understand your pain point if interest rates go back to say, 5-6%. What do you do then?

Property taxes are another factor. What are they, and assuming they rise faster than inflation (I suspect in the long run they do) how will it look in 10 years?

The point about urban encroachment is important-- that does tend to be when landowners cash in big time. How likely is that?

In terms of dollars and cents return, it's likely stocks will outperform in the long run. Long run real return (including income) on farm land in the UK, for example, is about 1% pa.

jornsy
Posts: 16
Joined: Tue Jul 10, 2012 4:21 pm

Re: Purchase farmland or sell it?

Post by jornsy » Mon Oct 06, 2014 1:29 pm

Here is an update to my post back in March. We decided to buy out my wife's aunt share of the land that is next to our house, approximately 77 acres. The aunt is keeping the other piece of farm land (22 acres) her family. We will continue to rent the land for the rental income. This way no one can build a house next to ours and we have full control of the property. Like I said earlier, this land has been in the family for over 100 years, so my wife does have some emotional attachment to it.

I think the rental income from the farmland will help diversify our investment strategy. We will continue to put money aside in my 403b and 457b, along with maxing out our Roth IRAs. We may use some of the rental income in the future to help fund our Roth IRAs.

Thanks for all the input and suggestions along the way. I have learned lots from all you bogleheads over the past two years and look forward to learning a lot more in the future.

TJ

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