Kettle Moraine, WI | SodbusterIII - 2/28/2024 08:58
well Not buying is actually a better counter to land price decline than selling in many cases. So lets say you have 2 qtrs of land you bought 10 years and 7 years ago you owe 40% of the original purchases price but land has doubled in value since you bought it. what would be better to use that land as collateral for another purchase or simply sit on the land and pay it down?
5,000 x 320 =1.6million x 40% = 640 thousand left to pay off and 2k per acre of debit , add a qtr @ 10k or 1.6million of debt total debt with new purchases is 2.24 million in debt over 480 acres or $4,666.00 per acre of debt if land goes to 5k bank will sell you out.
320 sold at 10K is 3.2million less 7% sales commission leaves 3 million or 1.4 in capital gains to have taxes paid on less 640k of original debt leaving you with capital gains matters which state you are in but lets say fed and state take 33% of the capital gains so lets say you have the 640k in payments and the 400k in capital gains leaves you with 2 million of a 1.6 million investment. vs continuing to pay down a manageable debt on a good property. if land drops by 70% over the next 5 years you continue to pay of the debt and you have a valuable property to use to by land @ 3k per acre. if not your heirs get a step up in basis and you avoid capital gains and still keep the rent off the land to use to enjoy your retirement years.
so selling is not the only way to combat land values falling.
Your math is great and why many people aren't worth what they think they own. There is taxes to pay and transaction expenses not yet payable. Doing nothing in farmland ownership has been above market performing and many can be celebrated for doing little to nothing.
I believe your point also with the appreciated land now at 10k minus taxes and fees owed upon sale means the person buying the same 10k land that you own has a larger investment than you because your same investment is only worth ~7800 an acre to you. So the new buyer has a lower rate of return on the same than you continuing to hold it.
The problem with looking at farmland with blinders on is only seeing farmland as a binary buy/sell decision in the one commodity (holding being a form of buying aka not selling) while ignoring other investments. So the risk is underperformance to all investment options. There are so many possibilities to invest the dollar that can accelerate your dollars beyond owning farmland. Easiest farmland example. Make $100 an acre on rented land (or paying yourself fair market rent in the analysis) on $800 an acre inputs in 9 months of crop growing for 12.5% return or 16.7% annualized. And that could be done on 70-80% borrowed money with an insured risk and open upside.
Farmland is linked to the value of the US dollar and it appears they will be continued inflation and more dollars printed so assets that may act as inflation hedges will trend upward along side the dollar. Underperformance relative to other investment in inflation adjusted dollars is the biggest risk I see to maximize long term gains.
Selling the farm is about the only way to manage the risk because remortgaging the farm to extract dollars to hedge against underperformance risk is a handicapped position via bank interest.
And don't worry I get and feel the same way that is is nice to hold the farmland deed for physical security and many including myself will take a discount to my financial return to possess it. If I was investment atheist I may be selling and looking for better returns in the intermediate term. |
with all the post ranting against the possibility of land values
