Advice on Using Equity

[Matt Hubert]

Hello

I am looking for some help in considering the purchase of a family members property.  The property is a farm that has been in the family for about 80 years and is currently held by a family member of deteriorating health.  He took out a note several years ago and still owes on the property and does not have anyone to pass it off to.  Therefore, I am interested in buying him out, but before I do I want to understand if it helps me or hurts me in my investment journey.

I would be buying 60 acres for $260,000 and it would cost me $60,000 for the down payment and closing costs.  Current market value is between $9k-$10k per acre, so $540,000 to $600,000.

My big question is I don't fully understand if/how I can use that equity effectively to help out with other BRRRR properties. If I chose not to buy this property, I would use the $60,000 down payment to buy a couple BRRRR properties this year. The farm will not cash flow and it will cost me $400 per month for the next several years. On the other hand, BRRRRs will cash flow slightly.

I personally think that the farm purchase is more of an emotional decision for me and I am leaning towards not going forward so I can invest in BRRRRs which helps me achieve my goals more quickly.  But, if the equity is a useful tool that helps me complete BRRRRs then I would consider moving forward with the farm to keep it part of the family.

To those with more experience: What would you do?

[Ty Coutts]

Hello, Matt Hubert, It's a significant decision, and weighing the emotional attachment against financial goals is never easy. Here’s a detailed analysis to help guide your decision:

Initial Costs:

Purchase Price: $260,000
Down Payment and Closing Costs: $60,000
Monthly Cost: $400 for several years

Market Value:

Current Value: $540,000 to $600,000
Immediate Equity: $280,000 to $340,000 (based on the market value minus the purchase price)

The substantial equity in the farm can be a powerful tool for your investment journey:

Home Equity Line of Credit (HELOC): You could use a HELOC against the farm's equity to fund other investments. This allows you to leverage the farm's value without selling it.

Cash-Out Refinance: If you refinance the property, you can pull out cash based on the equity, which can be used for down payments on BRRRR properties.

Collateral for Loans: The farm can be used as collateral for obtaining loans for other investment properties.

BRRRR Investments:

Immediate Cash Flow: BRRRR properties will likely generate some positive cash flow right away.

Faster Turnover: BRRRR allows you to recycle your capital more quickly, aiding rapid portfolio growth.

Initial Investment: $60,000 can potentially fund multiple BRRRR properties, providing diversity and multiple income streams.

Farm Investment:

Emotional Value: Maintaining the farm within the family has intrinsic value that cannot be quantified.

Long-Term Appreciation: The farm's value may appreciate significantly over time, providing a substantial future asset.

Monthly Cost: The $400 monthly cost needs to be factored into your budget, as it’s a non-cash-flowing asset in the short term.

Decision Points:

Emotional vs. Financial Goals: If keeping the farm in the family holds significant emotional value, this can justify the purchase despite the initial lack of cash flow.

Investment Strategy:

If immediate cash flow and rapid portfolio growth are your primary goals, BRRRR properties may be the better option.

If you can leverage the farm’s equity effectively, it could still serve your investment goals while preserving the family legacy.

Ultimately, the decision hinges on balancing emotional value and financial strategy. I’m here to help you explore financing options and further analyze the potential impacts on your investment journey.

What are your thoughts on leveraging the farm's equity for future investments? Please message me a good number to contact you with if you're interested in discussing further. I am a licensed loan officer and would happily help you navigate this situation to the best of my abilities. I hope this finds you well!