Sell Farmland and Invest in Income Producing Property?

Question

Im hoping you guys can help me out here.  We have family farmland of about 20 acres right in the heart of a booming housing market.  I have  interested parties who could pay cash as we would not subordinate the land due to the unforeseen future.  The raw land value is worth about $100K-$120K/acre depending on how much fill and work needs to be done.  My idea that I'm going to present to the family is to sell the land and 1031 it into rental units.  I ran the numbers and we would get only about a 5.5% return or about $10,000/month. General consensus from the family is that we should do it with the least amount of risk. Could you think of a better way to do this? Thanks in advance for you advice!

Rebecca Belnap · Answer

It looks like you want to have low risk and so you are wanting to buy the rentals for cash.  It is very safe, but doesn't leverage your money.  One option that is still low risk is to buy double the rental properties using a 50% down payment.  Then your income is $20,000 per month.  Even if the loan payments and extra expenses were $10,000 per month it would net the same in the first year, but as time goes by the added appreciation, rental inflation, and depreciation would make it a better long term investment.

Mike Staheli · Answer

HI Guys, Im hoping that this thread is still available and you can help me out.  We are finally in the process of applying for a zone change to get R-1-12 and R-1-10 from agricultural use.  Ive been talking to a friend who works with a big developer in the area and he is recommending to get the plat recorded and just sell off the paper lots.  Do any of you have experience with that?

Much Appreciated !

Jay Hinrichs · Answer

@Brandon Rindlisbacher  they probably don't want to go into dealer status.

the biggest profits made in most US real estate transactions are the farmers selling to devlopers

I suspect this property if its long term famiily property has basically a zero basis.. so tax implications are one of the drivers here.

of course they could just sell for cash  pay the cap gains ( historically low ) give each of the 8 heirs their dough and let them all go their seperate way.

I deal with this every year.

I have a 160 lot deal I am working on in Oregon  6 heirs.. and then I need an easement from the neighboring farm and they have 3.. LOL   lots of porch time.

Mike Staheli · Answer

These are all great ideas and if it was solely my money this is exactly what I'm looking for.  Im thinking to get the whole family(8) on board it would have to be the least risk possible.  I'm definitely going to present some of these ideas to the family though.  I do have a brother who is a CPA and another who is pretty business and investor savy too.  Hopefully we can put our heads together and figure something out.

I appreciate it!

Joseph Weisenbloom · Answer

I would aim for returns higher than 5% depending how much risk you want to take.  For all the risk involved in buying and managing rentals I would want at least 10%. If you want something truly passive and don't mind a lower return you could look at REITs or notes. Find some local investors to partner with and lend on their deals.

Chris Newman · Answer

@Mike Staheli Sounds like you know what you're doing and have a solid plan. :-)

Mike Staheli · Answer

Yes, we would be looking for the safest way to invest the money.  Maybe in the future we could leverage the investment and buy more.  The land is master zoned for 1/3 acre residential lots.  I am a local real estate agent and the area is projected to boom from 150,000 to 500,000 in the next 30 years. As of now we would stay local.  I'm thinking of townhouses as the primary investment and use a family member to manage them for a small fee.  I did factor in 7% vacancy rate, taxes, HOAS, insurance and monthly reserves for maintenance. I have 2 rental properties in the area that have not been vacant in the last 4 years@Chris Newman.

Chris Newman · Answer

Welcome to BP @Mike Staheli !

If a long term passive return is your goal, your plan of rolling the land value into rental units via 1031 is what I'd do. With those kinds of property values, there's no way that any kind of agriculture will return a profit, except perhaps unless you turn it into a 20 unit "farm micro-brewery agritourism business park." I'm not sure if Utah has the customer base for this, though. :-)

However, you haven't shared much here about the resulting "rental units." Are you talking residential? Active management on your part or outsourced to a professional management company for about 10% of rents. Have you factored this expense into your projected ROI?

Have you looked into commercial real estate, or a combination, for diversity? Personally, I prefer commercial because it means that I don't have to deal with residential tenants. There are usually reasons why some folks are renters instead of owners and the landlord is the one on the front line of dealing with them.

Where are you looking? Just locally? How's the growth rate there, which leads to escalating rents?

If you're going the passive ROI route, are you open to plugging some of the funding into high growth areas outside Utah? The Puget Sound region, for instance is undergoing explosive growth that's founded on new hiring by international tech companies and is expected to continue @ c. 10% for the foreseeable future.  There are plenty of seasoned local BP'ers who seek joint ventures. This isn't my thing (I focus on "junk" rural acreage with hidden values), but I can hook you up with some folks in my group.

Anyway, please keep us posted on your progress. We'll all learn something valuable from it.

Chris

Sell Farmland and Invest in Income Producing Property?

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